Earlier this week I wrote about how the U.S. steel industry is the one industry that is set to benefit the most from Donald Trump’s presidency. Over the past few days, I have continued my research on the sector in an attempt to find an attractive stock to play the trend myself.
One company I have stumbled upon that has all the hallmarks of an interesting, undervalued play on the sector is Ternium (TX, Financial).
Steel play
Ternium is a company that I have looked at before and owned. The company is a steel producer and miner, which owns production assets across South America, Central America and the U.S. Strictly speaking, the company isn’t a U.S. steel producer. The group has one production plant in Louisiana, and that’s it for the U.S. Still, the group produces value-added steel products, such as tubing, and owns stakes in several other South American steel groups, all of which will likely see benefits from higher U.S. infrastructure spending.
Ternium’s most attractive quality is the group’s love of cash. Unlike many other steel producers, Ternium has a relatively low level of net debt and pays an appealing dividend to investors, and its operations throw off a staggering amount of cash.
For example, at the beginning of November the company reported in its results for the nine months to the end of September that net debt had fallen by $92 million from the prior quarter to $1.1 billion or 0.7 times net debt to last 12 months EBITDA; free cash flow for the nine-month period was $486.5 million for free cash flow yield of around 10% at current prices excluding the fourth quarter’s figures; and during the first half of the year the company paid a dividend to shareholders equal to 3.72% of the current share price.
The majority of Ternium’s capital spending is now behind the company. After peaking in 2012 at $1 billion, capital spending dropped to $875 million in 2013 and around $450 million for 2014 and 2015, and capital expenditure has come in at $335 million for the first nine months of this year. The one big capital outflow that could be on the cards is the possible acquisition of German engineering giant Thyssenkrupp’s (XTER:TKA, Financial) Brazilian steel plant, which has a book value of 2 billion euros ($2.11 billion). It is widely expected that Ternium will pay much less if the deal does go ahead.
Will Ternium really benefit from Trump?
The bulk (62% of the first months of the year) of Ternium’s steel sales are to the Mexican market, so the group is extremely exposed to the Mexican economy. It may seem crazy saying a Mexican steel producer will profit with Trump in power, but there’s logic here.
As I wrote in an earlier article Trump’s policies to place huge tariffs on imported steel coupled with increased infrastructure spending will give U.S. steel producers a free hand to set prices at high levels. Price gouging by steel companies will impact the construction sector and will be bad for the overall economy. With this being the case, imported steel, especially value-added products like those Ternium offers, may become attractive again. As most of Ternium’s Mexico plants are located close to the U.S. border, this puts the company in a prime position to meet import demand and outmaneuver high-priced U.S. peers.
Conclusion
Overall, it’s likely Ternium will benefit from Trump’s presidency and right now shares in the company are trading at an extremely attractive valuation.
First off Ternium’s market cap is $3.8 billion against shareholder equity of $5.1 billion. The shares are trading at a forward price-earnings (P/E) of 9.8, EV to EBITDA of 4.4, price to free cash flow of 8.1, and price-sales (P/S) ratio 0.7. This attractive valuation may be too hard to pass up.
Disclosure: The author does not own any share mentioned within this article.
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