Does It Take Nerves of Steel to Invest in Ternium?

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.

Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and Saturn's orbit around the sun. Well, maybe not that last one -- but it targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.


Buy what you know
Based on my outperform ratings on miners like Taseko Mines and North American Palladium, as well as my underperform rating on China Shen Zhou Mining and Silvercorp Metals in the broad metals and mining industry, the CAPS supercomputer thought I also might be interested in steelmaker Ternium (NYS: TX) , one of five Stocks of the Day it offered up for my consideration last week.

With Europe in turmoil and even China's economy seeing slower-than-expected growth, the World Steel Association said production in April rose only 1.2% compared with a year ago. So let's see what Ternium has going for it that might warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

Ternium Snapshot

Industry Metals and mining
Sector Materials
Market Cap $3.7 billion
Revenues, TTM $9.2 billion
Return on Capital, TTM 8.7%
Dividend & Yield $0.75/4.1%
Cash $853 million
Long-Term Debt $1.5 billion
Free Cash Flow, TTM (OCF-Capex) $112.4 million
Recent Price $18.40
CAPS Rating (out of 5) ****

Sources: Motley Fool CAPS; S&P Capital IQ. TTM = trailing 12 months.

Steely reserve
Part of the Techint group of companies that range from tubular steelmaker Tenaris (NYS: TS) to oil and gas E&P play Tecpetrol, the Luxembourg-based Ternium is a play on the growth still expected from Latin America, particularly since, as noted above, the rest of the world seems to be slowing down. With its main operations in Mexico and Agentina, Ternium is also looking to expand further into Colombia and Brazil.

The latter, of course, has been a robust player on the world market, and despite some signs that economic contraction is hitting even there, it remains the center of intense industry expansion. Anglo American just agreed to supply Ternium for at least 10 years with iron ore output from its Minas-Rio project, where it competes against Vale (NYS: VALE) and other miners to expand output even as Ternium's parent Techint itself was buying up more than a quarter of the country's second-biggest steelmaker, Usiminas.

Held up at gunpoint
Usiminas is the largest producer of steel for the auto industry in Argentina, but by capitalizing on its network outside of the country, Ternium ought to be able to grow Usiminas even further as it competes against ArcelorMittal (NYS: MT) and Companhia Siderurgica Nacional (NYS: SID) , both of which have extensive operations in the country.

Although the prospects seem positive, Ternium needs to keep looking over its shoulder at the Argentine government, which finds itself in an acquisitive mood. Following in the footsteps of Venezuelan strongman Hugo Chavez, Argentina president Cristina Kirchner has been flexing her muscles. The government recently took over Spanish oil and gas company YPF on dubious claims of not investing enough in the country.

Already the government is a significant shareholder in Ternium's subsidiary Siderar, owning 26% of the steelmaker after it nationalized the country's private pension system. And Ternium is no stranger to governments stealing its assets, as Kirchner's mentor Chavez seized its assets back in 2008. The steelmaker was able to negotiate a $2 billion settlement for the assets, but losing a huge chunk of its business to thievery once again would be a big blow to performance.

Get out of Dodge
Which probably helps explain Ternium's desire to grow operations elsewhere. Results last quarter showed shipments falling from the year-ago period, though they were sequentially higher -- and though revenues themselves flip-flopped that situation primarily because the company saw higher prices. It's looking for profits to grow sequentially in the second quarter based on improving economic conditions in North America.

Shares of Ternium have fallen 38% over the past year as questions loomed about the health of the world economy, creating a depressed stock which CAPS member georgevtucker finds too cheap to pass up: "Insanely low p/e, solid dividend, manufacturing in a low-cost nation. Basic materials aren't recession-proof but are good inflation hedges (I think...)."

Risk without reward?
If you think Ternium's expansion opportunities make it a cheap stock, add it to your watchlist. However, I think the Argentinean government is increasingly coming unhinged and will make a move against the steelmakers sooner rather than later, so I'm rating it to underperform the markets over the next year or so. But let me know on the Ternium CAPS page or in the comments section below if you agree you need nerves of steel to invest in this leading steel producer.

If Ternium's growth ambitions pique your interest, you might also want to check out The Motley Fool's special report on three opportunities conquering emerging markets and which have also achieved domestic dominance. "3 American Companies Set to Dominate the World" gives a rundown of these three U.S. companies. Get your copy here today.

At the time this article was published Fool contributor Rich Duprey owns shares of North American Palladium, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of ArcelorMittal. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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