Monish Pabrai Does a Post Mortem on His Ternium (TX) Investment
Here are his comments on his investment experience with Ternium (TX):
Ternium was an investment we made in the second quarter of 2007. We invested almost $15 million in Ternium. At the time, I had estimated the intrinsic value was about $55 a share and a market cap of about $11 billion. It was trading at less than half of that. I was willing to buy and invest as long as I could get it below $27.50 a share. We bought it on average about $27 a share. We sold it a year ago at about $28.40.
The pieces didn't work out the way I expected it to, but we didn't lose any money. We made about a 5 percent return over a two-year period. That two-year period was a very tumultuous period because it includes the whole financial crisis and the great recession. Our first buys were around $26 in the second quarter of 2007. We were going to start selling the stock at about $50 a share and it got up to $44/share in mid 2008. Then the financial crisis hit. Ternium is a world class steel producer, and their order book got wiped out. Pretty much everyone canceled their orders. No one had any financing, and no one had the ability to buy anything from them. Their business almost came to a standstill.
At the same time, while this is going on, Hugo Chavez in Venezuela decides to nationalize their Venezuelan assets, which are pretty significant, about 1/4th of the total assets. There was a lot of uncertainty at the time about whether they would collect any compensation or if they would completely lose the value of that asset. This nationalization, along with the combination of the financial crisis, the great recession, and the wipeout of their order books collapsed the stock price to the $5/share level - an 85 percent drop in price. Pabrai Investment Funds did nothing through that period. We just held the stock.
Ternium is a very unusual steel company in the sense that it is vertically integrated. It owns a large amount of iron ore assets and coal assets, so it's not subject to all the volatility of the commodity prices. When commodity prices rise, Ternium gets a tail wind because they have their own captive mines. Ternium is similar to Walmart (WMT) and Costco (CSCO) in the sense that it's not like they do one thing better than the rest. They do a hundred things slightly better than the rest, and when you add those hundred things together, in aggregate it becomes a strong competitive advantage.
They were a company which on the outside looked like a normal steel maker, but when you drilled down you would find they set best practice after best practice in how they ran their operations. I liked the way they ran the business. They always ran their business under leveraged with plenty of cash on hand. They were able to ride out the storm without too much of a problem, and they were also, during that period, able to very successfully negotiate with Chavez in Venezuela. About a year after the nationalization, Ternium started collecting cash from Venezuela and they got paid a fair price for that business. Then I got to a point in 2009 where we could exit at breakeven or better. We had some other opportunities in front of us in 2009, which looked more promising.
The Ternium business is coming back. In fact, the whole thesis will play out pretty similar to what I had thought, but it will play out with a delay. It might take two or three years to get there. But we had other fish to fry in the meanwhile. I would say that one of the rules I have about selling is that I will typically not have an interest in selling a stock just because a price has dropped. The price might drop, but I won't sell unless I'm convinced that the present intrinsic value is below the present stock price. For example, when a stock's at $5/share, I have to have a high degree of confidence that the intrinsic value is below $5/share.
The only thing I would say to this point with Ternium is that things were very murky. I couldn't even figure out what the intrinsic value was at that point when the order books were wiped out. There was no clarity. In the absence of clarity, in general, I won't act. I'll just sit there and wait.
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Monish Pabrai (Updated on 05/18/2013)