Ternium Stock Forecast: Ternium S.A. is a manufacturer of high-quality steel products used in infrastructure and housing works. The company is Latin America’s leading steel producer, and operates production plants primarily in Mexico, Brazil, Argentina and the United States.
Why Is Ternium Stock Up?
Ternium has seen its share price steadily appreciate over the last 12 months, increasing from lows of $12.28 to highs almost 4x larger since. One important factor in this year-long run up is the fact that the steel market has been trading at especially high numbers of late, with no immediate sign of a slowdown in the offing.
Indeed, the front month price for HRC Steel on the London Metal Exchange is pegged at $1,384, and expected to rise by month 3 somewhere north of $1500.
After this, figures are forecast to fall, but will remain well above $1,000.00 in the back months for at least the remainder of the year, if not longer. Analysts have been revising their predictions upwards recently, so the sentiment overall is decidedly bullish.
Some explanations have been put forward as to why steel prices should be rising at this time, some more plausible than others.
A credible theory is that a cut in production at China’s Hebei steel manufacturing hub – possibly due to a breakout of COVID-19 cases there – has led to a squeeze on the supply chain, resulting in increased demand and a spike in prices.
The official explanation for a drop in steel output is because of China’s commitment to reduce pollution to meet its climate goals, but a chronic shortage of coal fuel in the country could also likely be a reason.
Whatever the cause, this is good news for Ternium and other steel manufacturers, who are all reaping the benefits of strong, front-loaded revenues and cash flows on the back of this welcome price boon.
Macro Tailwinds Supporting Ternium
A strong metals price isn’t the only trend helping the steel industry along at this time. Just as the coronavirus crisis seems to be receding, so too does the wider manufacturing sector appear to be opening up again, especially in the Eurozone countries.
Factories in Germany, for instance, are more or less at full capacity now, and British industry rallied itself to fulfill orders prior to leaving the EU for good at the beginning of the year.
Moreover, the recovery in Latin America, where most of Ternium’s production centers are located, is particularly strong.
In Mexico, the company enjoyed increased demand for its products from the finished goods market, especially the household appliance sector, and its expansionist aspirations in the country continued apace.
The revamped hot-rolling Pesqueria mill is almost complete, meaning reduced capital expenditures in the coming quarters and an influx of cash flows from a new revenue source.
Ternium’s Revenues and Earnings Results Are Strong
Ternium had a good financial year and posted improved figures across a number of key metrics.
The company’s Q4 2020 EBITDA saw a huge increase from the previous year, growing 145% from $263 million in 2019 to $645 million this time round. Likewise, with EBITDA margin, the firm enjoyed a 25% return in Q4 2020 compared to just 12% in 2019.
Net sales were also up 21% sequentially in the last quarter of 2020, and 15% year-on-year. Total shipments of product were up from pre-pandemic baselines, and revenues per ton were at their highest at any time in the last 12 months at $841.
Net debt for fiscal 2020 was also at a record low for any of the previous five years, coming in at just $0.4 billion, and down from a high of $2.7 billion in December 2017. Free cash flow was up year-on-year at $234 million compared to $85 million in 2019.
Despite the company missing its dividend commitments in 2020, Ternium has now reinstated the payout this year, and has increased its compensation by quite some way; the Board proposed a dividend of $2.10 per ADS, which is up from $1.20 in 2019.
What Could Hurt Ternium Share Price?
Ternium can rely on increased profits so long as steel prices remain high, but any unforeseen events upsetting this status quo would certainly induce a negative impact on its revenues.
With the drop in steel production in China, should that, or any other country, manage to re-institute normal levels of product output at any point, the downstream effect on the supply side would almost certainly cause lower steel prices going forward.
And while higher steel prices are great for manufacturing companies like Ternium in the short-term, the longer-term effects are not always as salutary.
When commodity prices rise, demand from end-product manufacturers drops, especially when those companies cannot pass on the cost to customers. If this happens, sales orders fall and revenues for the producer are reduced in turn.
There’s also the global semiconductor shortage for the company to worry about. Ternium’s management even brought up the issue during its latest results call, pointing out that the crisis caused a logistics bottleneck in the auto industry, leading to the car manufacturing segment becoming its weakest performing sector.
Ternium Stock Forecast: Revenue Boon To Come?
There’s plenty of optimism in the steel industry right now, with President Biden’s U.S. infrastructure plan in the works and an expected economic rebound on the cards. And it’s not just Ternium that has seen its share price grow recently; competitors in the sector, such as U.S. Steel (X) and ArcelorMittal, also enjoyed a share price boost over the last year.
With the global steel market increasing at a 7-year compound annual growth rate (CAGR) of 5.84%, and forecast to be worth around $168.24 billion by 2027, Ternium is in a perfect position to capitalize on this golden opportunity.
The Asia Pacific, Europe and North America regions are seen as the leading centers for both revenue and volume – regions that Ternium is either ready to serve, or already operating within.
Ternium’s revenues were up 14.7% year-on-year in its latest earnings report, beating the consensus estimate by $120 million. Analysts are predicting a 34.7% revenue increase for its next round of financial reports, and an increase of 72.2% after that to over $3.00 billion of total sales.
Couple this outlook with a very modest forward price-to-sales ratio of 0.4, and Ternium appears to have a large upside potential any which way you choose to frame it.
Finally, with no reason to suspect that steel prices are going to drop anytime soon, and a post-COVID recovery on the horizon, Ternium’s stock has to be a definite buy at this particular time.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.