Ternium S.A. (“TX”) – The Investor Weekly Stock Report
Ternium (“TX”) is a $10 billion steel and iron enterprise. The Company produces and distributes a range of semi-finished steel products, including value-added steel products.
TX is the beneficiary of a rally in global steel prices. The stock price has risen by more than 80% over the past six months.
The Company has gained tremendous momentum, yet is still only trading at 3.5x FWD P/E multiple. TX trades at a significant discount compared to its industry peers. In fact, the Company is undervalued by 50% or more across several key metrics: P/E, EV/EBITDA, Price/Sales, etc.
The Company has successfully launched a new mill, Pesquería, in May 2021, capable of producing substantial amounts of steel and specialized products.
Industrial markets, which are key for the company, are recovering, and steel prices are steadily climbing up.
Volatility in the market, and a general correction of steel prices will allow for a more attractive entry price (<$50.00). We recommend waiting for a pull-back before building a position in this stock.
Return vs S&P from 2016 to 2021
|52 Week High||$56.86|
|52 Week Low||$16.36|
|Price vs. 52 Week High||-2.90%|
|Price vs. 52 Week Low||237.47%|
TX, through its subsidiaries, manufactures and processes various steel products in Mexico, Argentina, Paraguay, Chile, Bolivia, Uruguay, Brazil, the United States, Colombia, Guatemala, Costa Rica, Honduras, El Salvador, and Nicaragua.
It operates through two segments, (1) Steel and (2) Mining. The Steel segment offers slabs, billets and round bars, hot rolled flat products, merchant bars, reinforcing bars, stirrups and rods, tin plate and galvanized products, tubes, beams, insulated panels, roofing and cladding, roof tiles, steel decks, pre-engineered metal building systems, and pig iron products; and sells energy. The Mining segment sells iron ore and pellets.
The company also provides medical and social, financial, scrap, and engineering services.
TX serves various companies and small businesses in the automotive, home appliance, construction, capital goods, container, food, and energy industries, as well as the heat, ventilation, and air conditioning sector. The company was founded in 1961 and is based in Luxembourg City, Luxembourg.
The Company has planned a 600,000 ton increase in steel shipments for the second half of 2021.
Steel Shipments by Country – 2020 FY
TX is vertically integrated from iron ore mines to service centers. The Company has a leading position in the Mexican steel market.
The Mexican market is the largest in Latin America. Growth in Mexico’s steel consumption over the last decades was driven mainly by a dynamic manufacturing industry. Mexico, Brazil, Argentina and Columbia accounted for approximately 80% of Latin America’s steel consumption in 2020.
The Company is targeting a 20% reduction of CO2 emissions by 2030. TX is currently intensifying the use of renewable energy, increasing scrap in the metallic mix, augmenting carbon capture capacity, partially replacing met coal with charcoal and prioritizing lower specific-emission technologies. TX is currently investing $460 million in CAPEX over the course of the next seven years to minimize their environmental footprint.
Máximo Vedoya is the CEO of Ternium.
Vedoya is the President of the Latin American Steel Association (Alacero), President of the National Chamber of the Iron and Steel Industry (Canacero) in Mexico, Vice President of the Chamber of the Industry of Transformation (Caintra) Nuevo León and Vice President of the Confederation of Industrial Chambers (Concamin). Since 1992 he has held various positions in the areas of Planning, Sales, Exports and Commercial, in the Ternium companies in Argentina and Venezuela. In 2010 he assumed the Executive Presidency of Ternium Región Andina, in 2012 he assumed the position of Executive President of Ternium Mexico, and on March 1, 2018 he was appointed CEO of Ternium.
The Company recently launched a new mill in May, known as Pesquería. The new rolling mill has a capacity of more than 4 million tons a year and will produce specialized steel for the automotive and white goods industries. The new hot rolling mill is 100% automated. With the completion of the new hot rolling mill, the Pesquería industrial Center has an annual production capacity of 4.4 million tons of hot-rolled products, 1.6 million tons of cold-rolled products, 830,000 tons of hot-dipped galvanized products and 120,000 tons of pre-painted products.
Output is expected to increase to 600,000 tons from 400,000 tons. There are excellent long-term prospects in the Mexican market.
Additionally, pending infrastructure investments in the US will have a positive impact on Ternium’s long-term results.
Steel demand will increase and prices will be driven up. The US market is not a core market for TX; it makes up less than 10% of the Company’s total revenue structure. With growth in infrastructure spending, however, TX will be able to capture additional market share from other suppliers as the market demand increases for both raw and finished materials.
Steel price is the largest driver of Ternium’s stock price. The steel segment accounted for 97.2% of all revenue and 96.79% of all EBITDA in 2Q 2021. Less than two months have passed since the beginning of the 3rd quarter and steel prices continue to remain elevated, as indicated in the 1-year and 5-year chart below.
One-Year Steel Index
Five-Year Steel Index
Analysts believe that there’s a chance that peak steal prices have not been reached. This is what Thorsten Schier, managing editor of Fast Markets, had to say last week: “I don’t think we’ve hit the peak for steel prices. Most people in the market see strength through the third quarter, and some don’t see it getting better on the buying side until 2022 sometime. It is just that supply is that tight. People are scrambling for material.”
The biggest risk facing TX is a decline in commodity prices. This does not appear to be in the immediate forecast, however, for the second half of 2021E. Beyond 2021, it is possible that a decline in demand from the construction industry, especially in key end markets, may put negative pressure on steel prices.
Negative news concerning the growth rate of the Chinese economy, which is the largest consumer of steel goods, has already provoked corrections in the industry. According to reports, Chinese factory activity has slowed. Imports of copper and iron ore have slowed amidst rising price pressures. Authorities ae releasing metal stock reserves to slow rallying prices, which raise manufacturing costs. The automotive sector’s production level, among other things, is another risk factor for the company. The sector remains hard pressed to keep up with production in light of shortages in the semiconductor industry and elsewhere.
There is also geopolitical risk in the regions where TX operates. South America, and Argentina in particular, hold near-term risk. The CEO referenced the legislative elections that will take place in November 2021: “The macroeconomic environment in the country [Argentina] continue to be unstable. Also in November, there are mid-terms inaction in Argentina, which could introduce a higher level of uncertainty in the market.
The below table highlight’s Ternium’s peers. The Investor Weekly is also bullish on CLF.
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Q2 2021 revenue increased by 21% compared to Q1 2021 (124% year-over-year) and amounted to $3.92 billion. The results beat analyst expectations by nearly $150 million given a favorable commodity price environment and growing demand.
TX’s Q2 EBITDA was $1.42 billion, which is 34% higher than in Q1 2021 and 534% higher than in Q2 2020. The EBITDA margin has increase substantially from 13% last year to 36.23% in Q2 2021. Management has, however, hinted that profitability (margins) may decrease in the long run.
“So even though it’s not reasonable to believe that will sustain this level of EBITDA pattern or EBITDA margins, we’re not expecting also to see a significant reduction on these numbers. So at this point probably will be easy to say that the margin of the range between 15% to 20% is something that we can easily overpass, but in a more normal market environment, this is something that we’ll continue to sustain.” Q2 2021 Earnings Call, Pablo Brizzio (CFO). But for Q3 2021, the CFO has also stated that for the third quarter of 2021, Ternium expects “to achieve new record EBITDA with higher margins and volumes”.
The below table shows select income statement data from 2015 through Q2 2021 on a TTM basis.
The EPS of $5.21 beat market expectations by $1.61. The last five quarters have produced a series of earnings beats.
The Company maintains an attractively low debt load. In fact, it has decreased more than 4X when compared to year-over-year metrics. Net debt is $0.2 billion and Net Debt / EBITDA is 0.1x. The Company has a more attractive debt profile than its peers: United States Steel (X), Cleveland Cliffs (CLF), Companhia Siderurguca Nacional (SID) and Reliance Steel (RS).
The stock offers a yield of 3.7%. Ternium announced a record $2.1 dividend per share in April, $412 million in total. The Company elected not to pay a dividend in 2020 due to the pandemic, but has since resumed the annual dividend payment. In 2019, TX paid a dividend of $1.20. The Company has historically offered a dividend with stable growth.
The Company anticipates record profitability and an increase in orders in Q3 2021. And Management indicated in its last earnings call that it expects the dividend to be sustained going forward. “So looking forward to 2022 and onwards, regarding dividends, I believe that I mean the dividend is approved or proposed by the board in February, we always do that and we pay dividends once a year. But looking forward, I think that this new level of dividends, at least this new level can be sustained into the future. I mean, as I said in the conference, we’re optimistic that the current steel business environment will provide Ternium with this opportunity, extraordinary dividends. Again, this is something that the Board of Directors should propose.” Q2 2021 Earnings Call
Given current levels of profitability there is a strong likelihood that the Company could see dividends approach $3.00 which, at current prices, would produce a 5% to 6% yield.
Expectations of TX’s 3Q EBITDA and Sales appear to be modest. We believe that there may be an estimate revision or a beating of these estimates. Industrial markets, which are key to the company continue to recover. And although their remains some concerns regarding the automotive sector, TX appears capable of mitigating current market challenges.
Profitability Metrics and Valuation
Looking at multiples, we see that TX trades at a significant discount to many of its peers. It trades at a 70%+ discount for P/E, 40% for EV/Sales, 40% Price/Sales, and 60%+ EV/EBITDA.
For more stock-specific articles, check out our Buy List, showcasing some of the top-performing companies in the markets!
We believe that the Company has a unique opportunity to increase to levels above $60. However, after rapid growth, you may be able to find a better entry point given the overall market. The Company stated in its outlook that it expects a higher EBITDA margin in Q3, as well as more steel shipments. There is a strong chance that the EPS values in the next two quarters will not decline as much as the street expects. We advise waiting for a pull-back in the stock price.
One Year Price Chart – TX
3 Month Price Chart – TX
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I am/we are long Ternium (“TX”) either through stock ownership, options, or other derivatives.
I wrote this article myself, and it expresses my own opinions, I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
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