For value investors like myself, it is becoming extremely hard to find an investment to which I am willing to commit in this strong market. A lack of opportunity at home has led me overseas and into some sectors that traditionally I would not usually look into. However, there have been some surprising results. Ternium S.A. (NYSE:TX) is a South American steel producer with operations in Argentina, Mexico, the U.S. and other regions. The company has seen a strong sustained demand for its products in recent years as rising steel demand in Latin America has far outweighed low demand for steel from the U.S. Ternium is a specialist in construction steel as well as flat rolled products and more specialist items. Although growth in South American markets could be starting to slow down, Ternium should benefit from the recovering steel market in the U.S.
Why is Ternium SA so special? What does the company offer the others don’t?
Well for a start, Ternium S.A. (NYSE:TX) unlike some of its peers, has an extremely strong balance sheet. Indeed, total debt is covered by current assets 1.8 times and net debt fell 15% in the first quarter of this year. Having said that, unfortunately the company is sitting on a $2 billion of inventory, leading to a current ratio of 1.5 and a quick ratio of less than one, although the company has been working to bring down inventory levels, which have fallen 10% since last year. Shareholder equity stands at $6.6 billion indicating a net asset value per share of $33 – 50% upside from the company’s current stock price.
Elsewhere, after discounting a one-off charge in Q4 2012 and removing the effects of debt repayments, ($300 million in debt was repaid during the last three reporting periods) over the last three quarters, Ternium S.A. (NYSE:TX) has registered an average net cash inflow of $150 million per quarter, or 7.5% of revenue. This strong cash flow is the reason behind the company’s solid balance sheet. Additionally, the strong cash flow highlights the strength of the company’s operations—while the steel industry as a whole has been going through its worst year since 2009, Ternium still remains cash generative.
Ternium S.A. (NYSE:TX) shows value by other metrics as well. The company trades at a TTM EV/Revenue figure of 0.86x, below its five year average of 0.9x – bearing in mind this figure includes results from 2008/2009. Moreover, Ternium, despite its strong balance sheet and cash generative nature, trades at a discount to its peers on both an EV/EBITDA and EV/EBIT basis. Peers US Steel, ArcelorMittal (NYSE:MT), ThyssenKrupp AG (FRA:TKA) and Nucor trade at an average EV/EBITDA ratio of 6.5, a 15% premium to Ternium’s EV/EBITDA ratio of 5.7. In addition, these peers trade at an EV/EBIT ratio of 14.2, 80% higher than Ternium’s EV/EBIT ratio of 8.0.
Ternium Outlook May Be A Low-Risk, High-Reward Play
Ternium S.A. (NYSE:TX) expects the South American market for steel to grow around 6% during 2013, with growth stemming from the construction and auto sector. However, the U.S. steel market remains sluggish but Ternium’s vertically, integrated production line, incorporating the mining of iron ore all the way through to the production of steel give the company a cost advantage over its peers, which should allow the company to stay cash flow positive.
Overall, Ternium S.A. (NYSE:TX) offers an interesting value proposition in a depressed market. The company is well capitalized with highly cash generative, vertically integrated production operations. Moreover, Ternium is cheap compared to its peers and currently trades at a 50% discount to the value of its assets. All in all, a relatively low risk but high reward value play.