The Street's Risk Aversion Is Dialed Up To "11" On Ternium

I thought that there was already a steep risk premium in Ternium (TX) shares back in February, largely on the emerging economic weakness in Mexico and some Covid-19 concerns. Since then, that premium has expanded significantly as Covid-19 has swept around the globe and further worsened the near-term outlook for Mexico, Brazil, and Argentina. On top of that, I don’t think Ternium did investor confidence any favors by suspending the dividend, even if it was an action taken out of an abundance of caution.

My stock argument on Ternium basically comes down to this – this is still one of the most profitable publicly-traded steel companies in the world (on an EBITDA/tonne basis), and it still has an attractive growth profile on the basis of economic development in Mexico and Latin America, as well as leveraging auto production opportunities. If baseline assumptions like 2% long-term growth, mid-single-digit ROE, and a “full-cycle” EBITDA of $1,550M are credible, these shares are meaningfully undervalued today.

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The Street's Risk Aversion Is Dialed Up To "11" On Ternium