Based in Luxembourg, Ternium S.A. (TX) is Latin America’s leading flat steel producer, operating facilities in Mexico, Brazil, the Southern United States, and Central America. The company expects its fourth-quarter EBITDA to decline slightly. However, its volumes sold in the USMCA region are expected to increase in the quarter. Also, its shipments are expected to remain steady in Argentina.

TX has been paying dividends consistently every year since 2007. Its dividend payout has grown at a 38.1% CAGR over the past three years and 26.4% over the past five years. While the four-year average dividend yield for TX is 3.62%, the current dividend translates to a 7.11% yield. On on November 19, it paid a $0.08 per share ($0.80 per ADS) interim dividend, totaling roughly $157 million in aggregate. The stock has gained 7.2% in price over the past month and 24% over the past six months to close yesterday’s trading session at $40.77.

TX signed a memorandum of understanding with Vale S.A. (VALE) on August 19 to pursue opportunities to develop steelmaking solutions focused on reducing carbon dioxide emissions. And according to a Research and Markets report, the steel market is expected to grow by 614.20 million tons over the next five years, benefitting TX. So, its near-term prospects look promising.

Here is what could shape TX’s performance in the near term:

Revenue Growth Across Major Categories

TX’s net sales increased 115% year-over-year to $4.59 billion for the third quarter, ended September 30, 2021. Its net sales from the steel segment increased 116% year-over-year to $4.57 billion, while its net sales from the mining segment increased 44% from the same period last year to $131 million.

Its profit came in at $1.37 billion compared to a $21.10 million loss in the year-ago period. Its EBITDA increased 432.1% year-over-year to $1.88 billion. In addition, its FCF came in at $475.40 million, representing a 22.3% year-over-year rise.

High Profitability

In terms of trailing-12-month gross profit margin, TX’s 36.57% is 19.9% higher than the 30.50% industry average. The stock’s 25.25% trailing-12-month net income margin is 196.8% higher than the 8.51% industry average. In addition, its 44.19%, 24.96%, and 22.39% respective trailing-12-month ROCE, ROTC, and ROTA are higher than the 11.64%, 7.55%, and 5.28% industry averages.

Favorable Analyst Estimates

Analysts expect TX’s revenue to increase 79.8% for the current quarter, ending December 31, 2021, and 86.8% in its fiscal 2021. The company’s EPS is expected to grow 137.4% in the current quarter and 544% in the current year. Also, Wall Street analysts expect the stock to hit $56.33 in the near term, which indicates a potential 38.2% upside.

POWR Ratings Reflect Rosy Prospects

TX has an overall A rating, which equates to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. TX had a B grade for Growth, which is in sync with analysts’ expectations that its revenue and EPS will increase.

The stock has a B grade for Quality, which is consistent with its higher-than-industry profitability ratios. It also has a B grade for Momentum, which is in sync with its 7.2% gains over the past month and 40.2% year-to-date returns.

TX has a B grade for Value. This is consistent with its 2.05x forward non-GAAP P/E , which is 86% lower than the 14.62x industry average. And its forward EV/S and P/S of 0.61x and 0.51x, respectively,  are lower than the 1.74x and 1.48x industry averages.

TX is ranked #4 of 34 stocks in the A-rated Steel industry. Also, click here to see TX’s ratings for Sentiment and Stability.

Bottom Line

TX’s shares are currently trading 28.3% below their 52-week high of $56.86, which it hit on August 11. However, the company has sound fundamentals with robust FCF and a high and stable dividend yield. Moreover, it is expected to benefit from the growing demand for steel across the construction, home appliance, and automotive sectors. So, we think it could be wise to add the stock to your portfolio now.

How Does Ternium (TX) Stack Up Against its Peers?

While TX has an overall POWR Rating of A, one could also check out its other A-rated industry peers: ArcelorMittal (MT), Mechel PAO (MTL), and Acerinox, S.A. (ANIOY).

Note that MT is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.

TX shares were unchanged in premarket trading Tuesday. Year-to-date, TX has gained 50.79%, versus a 22.88% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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