Ternium (NYSE:TX) announced its third-quarter earnings results this week and reported a significant bottom-line beat. $0.74 per share was the number reported, which was $0.43 per share north of consensus. The company also beat on the top line as sales came in at $2.14 billion ($113 million ahead of consensus). These numbers really demonstrate how the company is recovering the lost momentum due to the pandemic earlier this year.
In fact, when we penned a piece on Ternium back in August after the Q2 numbers, we stated that management expected a strong finish to the year due to growing demand in many of its markets. This expectation certainly played itself out in Q3 as lockdowns eased somewhat compared to the previous quarter. Shares are now up almost $7 a share (30%+) since late July and the long-term technicals are stating that this rally should not run out of steam anytime soon. We state this because the recent up-move has resulted in the MACD indicator giving us a clear crossover (buy signal). As stated in our August article, we believe this crossover represents the best, long-term buying opportunity in this stock since 2009.
Analysts on the recent Q3 earnings call were sounding management out on areas such as Argentina, demand in markets such as Mexico and Brazil as well as capex spend going forward. One could sense the understandable uncertainty (with respect to Ternium’s forward-looking guidance), as there remains so many items which are out of the company’s control.
The first and most prominent is obviously the virus. If we return to similar lockdown conditions like we did at the start of the year, there is no doubt that demand will continue to be somewhat subdued. The uncertainty surrounding the macro condition in Argentina is another area where Ternium has limited control. The company witnessed a solid improvement in this market in the third quarter, but the latest debt restructuring will only most likely bring stability to the country for a temporary period.
Brazil luckily enough for Ternium has been less affected by the virus compared to its neighbors in the region. Management expects that the auto industry will keep on driving demand in this market. Automotive demand is also on the increase in Mexico. Management is expecting a strong fourth quarter in this market with shipments expected to return to pre-pandemic numbers due to strong demand from multiple industries in Mexico as well as in the US.
The internal fundamentals (and subsequently the level of shipments) though of the markets mentioned above are for the most part out of Ternium’s control. What we look for is execution on profitability. Ternium can’t in effect decide its own future earnings, but management can structure the company to be able to significantly take advantage of strong demand when it presents itself. Remember it is bottom-line growth which is the main driver of Ternium’s share price
What drives earnings are sales and assets, and this is where Ternium looks really attractive at present especially on the assets side. In the recent third quarter, almost $7 billion of equity was reported on the balance sheet. This is the highest book value we have seen in Ternium in more than a decade. Furthermore, most of the assets that make up this equity are hard assets (property, plant, equipment & cash), so there is little to be written down here. As assets grow, the “capability” of growing earnings increases significantly. Management talked about this on the recent earnings call.
The operating cash flow of $1.8 billion and the $5.36 per share in free cash flow over the past four quarters are also the highest cash flow numbers we have seen from Ternium in any fiscal year for more than a decade. Furthermore, this cash flow was realized with over $500 million being used to pay off debt over the past four quarters. Suffice it to say (even in a difficult market), Ternium is demonstrating that it still has the wherewithal to keep on generating cash flow which should keep the capex budget strong going forward.
Therefore, to sum up, we would recommend investors to keep their focus on the big picture. Ternium has showed throughout this pandemic its ability to keep on generating cash flow as well as increase its equity. Suffice it to say, we believe the technicals are accurate, which should mean that over time, price should break above the highs of 2018. Remaining long.
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Disclosure: I am/we are long TX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.