Ternium SA (TX) is riding out a tough steel market by betting on strong Mexican demand. The company has surprised on estimates 3 out of 4 quarters by an average of 18.97%. TX is cheap. It trades at only 2x forward earnings.

Company Description

Ternium manufactures flat and long steel products in Argentina, Mexico, Guatemala and the United States. The company is one of the largest steel production companies in Latin America with production capacity of 10.8 million tons. Its primary place of operations is in Mexico and Argentina.

Ternium extracts iron ore from its own mines to process semi-finished steel, flat-rolled products, long products, welded tubes and beam and roll-formed products.

Growth in Mexico

The company sees growing demand in Mexico for flat-steel products in the medium term, spurred by new construction and industrial development. In early September, Ternium announced a $4.2 billion investment over the next 5 years in a new flat steel plant in Mexico.

The facility will require a total investment of over $2.7 billion for a flat-rolled mini mill which would begin production within 4 years. The second phase, which would be the construction of a cold rolled and galvanizing plant, would be completed by 2013 and would require an addition $1.5 billion.

Ternium Beat Wall Street Estimates by 59.23% in the Second Quarter

On Aug 5, Ternium reported second-quarter earnings and blew by Wall Street estimates by 77 cents. Net income rose 58% to $498.9 million from $315 million in the second quarter of 2007. Earnings per share climbed 75% to $2.07 from $1.18 in the year ago period. Analysts expected $1.30 per share.

Sales increased 89% to $2.4 billion from $1.2 billion in the second quarter of 2007. The increase was due to the effect of the consolidation of Grupo Imsa and higher steel prices. Shipments of flat and long products also increased 29% from the second quarter of 2007.

Demand Remains Strong

In early August, Ternium was forecasting strong demand and prices in the South & Central America regions. The company saw the North American Region softening in the second half of 2008.

Consenus Estimates Rising on Third Quarter and Full Year

Despite the commodities sell-off, analysts are bullish. 2 out of 3 covering analysts have raised full year estimates in the last 30 days to $5.97 from $5.44.

Third quarter estimates have also spiked by 11 cents to $1.40 in the same time period.

Analysts expect strong 2008 year-over-year earnings growth of 54.35%. Ternium reports third-quarter earnings on Nov 11.

Value Fundamentals

Ternium is a Zacks #1 Rank (Strong Buy) stock. It’s dirt cheap. TX has a forward P/E of only 2.03. Its price-to-book is just 0.43. The company has an excellent 1-year return on equity (ROE) of 26.74%.

Content Courtesy: Zacks Investment Research

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