Ternium: Financial trends clearly demonstrate excellent management (NYSE: TX)

scanrail/iStock via Getty Images

As we pointed out in the previous comment, I owned Ternium SA (TX) when the stock was near single digits in the spring of 2020. I owned the stock for a while this year there, but I eventually lost my basket of stocks due to them eventually being “bought back” through covered call writing. Although the steelmaker’s shares have more than doubled since I owned the shares, there’s still a lot to like here, especially from a company management perspective.

Ternium <span class=

Ternium remains in bullish mode (Stock charts)

Several times in our commentary, I talk about how a company can only really focus on the areas where it has control. This is particularly poignant in the steel industry which is cyclical in nature. Good management literally has to make hay while the sun is shining to ensure that the inevitable downturn doesn’t materially affect the business.

That’s why Ternium’s current pound multiple of just under 0.8 caught my eye. Why? Because when I was trading that stock back when the company was between $11 and $12, the book multiple wasn’t far off from where it is now. Let that sink in for a moment. Many investors believe that all things being equal, a stock’s valuation will increase significantly if there is a large change in the stock’s price over time. However, Ternium shares have risen nearly a factor of 4 over the past 23+ months, but the stock is still trading comfortably below book value. How can this be so? Because management holds the key.

While the demand for Ternium’s products (and therefore their pricing power) is essentially beyond management’s control, how the company’s money is spent is more certainly within its control. At the end of the company’s recently released third quarter, which ended at the end of September last year, equity on the balance sheet stood at $9.7 billion. This number represented a sequential increase of nearly 14% and an increase in equity of 45% over the same 12-month period prior. Encouraging figures to say the least.

This upward trend indicates a continuous improvement in added value, which essentially corresponds to the desire of shareholders. The company’s book value per share has already fallen from $34.06 at the end of Ternium’s last fiscal year to a trailing twelve-month average of $49.43. On the asset side, it is mainly the company’s current assets (cash and ST investments as well as inventories) that caused the increase in book value. The company’s assets grew nearly 9% in the last quarter reported by Ternium. Liabilities, on the contrary, only increased by 2.7% during the same period.

When we see trends like these, we know we are dealing with good capital allocators. The second area for management to control concerns the profitability of the company and more particularly its return on invested capital. Followers of our work will know that we favor value games that consistently increase their sales. The reason for this is that if a business has the ability to consistently increase its revenue, which results in positive cash flow generation, that same money can be used to reinvest in the business through greater accumulation of cash flow. assets in order to increase turnover. sales growth once again. A beautiful round.

Over the past four quarters, Ternium generated nearly $1.9 billion in operating cash flow, of which $737 million was used for investing purposes. Given the recent increase in earnings, we would prefer to see more of this cash invested based on current trends. The reason is that Ternium’s last quarter earnings per share growth of 771% means the company’s return on invested capital is currently 35.2% on a trailing 12-month average.

Investors really need to digest the above earnings trends, especially since less than 40% of the company’s cash flow from operations (TTM) has been reinvested in the business. Suffice it to say that if trends continue with respect to return on investment, more and more cash flow will continue to be available to management and returned to shareholders.

Therefore, to sum up, the trends discussed above in Ternium with respect to book value per share as well as return on invested capital clearly show that management has performed very well lately. 2021 is expected to be a banner year for the company, so it will be interesting to see how steel markets perform in 2022 from a price perspective. While aggregate demand is something that management cannot control, management most certainly continues to execute in areas where they have full control. We look forward to continued coverage.

Comments are closed.