Thursday, August 6, 2009

Ternium Revisited

I started this blog on June 11th with an article on Ternium (TX). After a subsequent 36% gain, it's time to revisit the company. While I hope the 3 or 4 people reading this blog already bought the stock, there's still opportunity here.

Let's begin with the conclusion. With a market value of $4.75 billion or $23.78 per share, Ternium is still cheap. Even after a 178% year-to-date gain.

Anyone can look at a stock chart and say, "look what I could have paid for XYZ". It can play with your mind and cause you to miss great opportunities. Ever look at a chart of Berkshire Hathaway? Where was your money in 1965? Imagine the guy who passed on Berkshire because it had already doubled (the first or second or third time)?

Investment value doesn't depend on what Mr. Market said last week or last year. The question is what I do today given these fundamentals and this price.

Ternium is closer to fair value than it was, but it's value is obvious to anyone willing to look. It's a much different company today than it was 6 months ago. Before the Sidor deal with Venezuela (see the June post), investors saw only uncertainty. Sidor produced approximately 4 million metric tons of steel and 3.5 million metric tons of finished steel products annually. Ternium as a whole produced a total 10 million metric tons of steel and approximately 12 million metric tons of finished steel products (including Sidor) annually. It was a big piece of the pie and then it was gone!

Comrade Chavez just took it. Or did he?

This uncertainty meant that the "new" slimmed-down Ternium got no love from investors. How do you value a company where whole divisions just disappear? Irrational fears sent the the stock down so much that the recent pop is fairly insignificant by comparison. Scared investors more than compensated for the loss of Sidor. In 2008 TX traded in the 40's! It's still hard to believe that I bought TX shares for $9 a share this calendar year. The market cap was less than $2 billion.

Today, a degree of certainty has returned to Ternium and it shows in the stock price. Venezuela is paying for the Sidor stake it nationalized. Regular cash payments are being paid through October 2010. Some of the cash has been received and more is on the way. The last pages of the Sidor chapter are being written, allowing the company to focus on its remaining divisions. Thankfully, they are located in friendlier territories.

Ternium remains cheap for a number of reasons. The first is complete ignorance of the Sidor story. Investors also don't appreciate the strange (and advantageous) structure of Ternium. Only 15% of TX shares actually float. The remaining 85% is owned by a pair of conglomerates. Of 200 million ADR equivalent shares, only around 30 million shares actually trade. A public float of about $700 million is up for grabs by outsiders.

The controlling shareholders should ensure that cash flow is well allocated and that excess cash is paid out. Ternium's past is a testimony to this fact. Before this period of unheaval, Ternium was indeed a dividend payer. There is also the possibility that we pesky outsiders get bought out. Think about it... the controlling shareholders have enough cash in the Ternium coffers to buy us out (and then some).

As of June 30th, cash and equivalents stood at $1.8 billion or 38% of Ternium's market value. This leads to the last major reason Ternium is still undervalued. It seems few investors appreciate the numbers involved. In addition to the cash, Ternium's Sidor receivables (short & long-term) equal $1.4 billion. The total comes to $3.255 billion. A moment of silence please!

Ternium's short and long-term debt is $768 million and $2.054 billion respectively. In short, Ternium has the best balance sheet in the steel business, which remains a consolidating industry. In addition, Ternium is well positioned in an intriguing part of the world with capable managers.

The recent earnings report didn't help matters. The Sidor transaction and forex gains obscure the underlying operating fundamentals, but essentially Ternium is breaking even. Not bad in the current environment. And this is a company that is capable of earning hundreds of millions of dollars in better economic times.

$4 billion is an absurd valuation. $1.8 billion in cash with another $1.4 billion on the way? That should be enough to prove the point. Nonetheless, the recent stock surge serves only to obscure this fact in the minds of value investors. Face it.. Most of us are loathe to buy anything that isn't camped out on the "new low" list.

For those who own TX, hold on. For those who don't, just buy it. Even if you have to hold your nose to do it.

Read the financials and look back at what this management team has accomplished.

And if you just can't take my word for it, here's another lonely voice on Ternium!

Ternium Still Delivers the Cash

Thanks for reading, The Lonely Value Investor

3 comments:

  1. Breaking even isn't bad at all in these times. U.S. Steel's posted losses in the first two quarters of this year.

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  2. Thank you for your analysis. Do you have a target price? Email your thoughts to mfeinberg@yahoo.com

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  3. Ternium is worth at least $30 a share in my opinion. Any more will depend on a rebound in the underlying steel business.

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