The stock of Ternium SA (NYSE:TX, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $38.84 per share and the market cap of $7.6 billion, Ternium SA stock shows every sign of being significantly overvalued. GF Value for Ternium SA is shown in the chart below.
Because Ternium SA is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Ternium SA has a cash-to-debt ratio of 0.67, which is in the middle range of the companies in Steel industry. The overall financial strength of Ternium SA is 6 out of 10, which indicates that the financial strength of Ternium SA is fair. This is the debt and cash of Ternium SA over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Ternium SA has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $8.7 billion and earnings of $3.86 a share. Its operating margin of 12.36% better than 87% of the companies in Steel industry. Overall, GuruFocus ranks Ternium SA's profitability as fair. This is the revenue and net income of Ternium SA over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Ternium SA is -3.4%, which ranks worse than 72% of the companies in Steel industry. The 3-year average EBITDA growth rate is -1.9%, which ranks in the middle range of the companies in Steel industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Ternium SA's ROIC was 7.69, while its WACC came in at 6.33. The historical ROIC vs WACC comparison of Ternium SA is shown below:
To conclude, The stock of Ternium SA (NYSE:TX, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Steel industry. To learn more about Ternium SA stock, you can check out its 30-year Financials here.
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