TX Stock: Is Latin America’s Leading Steel Producer a Buy
After a big slowdown during the pandemic, steel producers saw demand ramp up last year. Latin America’s biggest steel producer, Ternium (NYSE: TX), achieved record profitability in 2021. Yet TX stock has lost over a third of its value since hitting an all-time high last August.
Ternium consists of two segments, steel, and mining. The company mines iron ore, a key raw material for making steel. Then, Ternium will turn it into finished and semi-finished steel products.
So far, the steel company has over 12.4 million tons of finished good capacity a year. With 18 plants and two mining operations, Ternium is a leading supplier of steel products.
With construction projects picking up last year, Ternium looks to keep pace. In fact, the company looks to be America’s leading steel company. But will rising interest rates and inflation derail its mission?
Furthermore, the war in Ukraine is leading to a global supply chain disruption. Ukraine and Russia both play a major role in the steel market.
At the same time, Latin America is prime for development. Keep reading to learn how Ternium can benefit and what to expect from TX stock next.
Steel Prices Down in 2022
Although steel demand recovered by 16.5% in 2021, it has been disappointing this year. According to recent data, steel prices in the U.S. are down about 15% in 2022. With this in mind, there are a few explanations for the fallout.
- The war in Ukraine is disrupting global supply chains.
- Higher interest rates and inflation make construction projects more expensive.
- China, the leading steel consumer, placed strict measures on property developers.
For one thing, as the fed continues raising interest rates, it makes loans for construction projects more expensive. On top of this, inflation and supply chain issues are making materials more expensive. So, the spillover is not a surprise.
Furthermore, China’s regulations are making it harder for developers to build. As a result, companies like Evergrande defaulted on debt, sending a ripple effect across China’s property market.
The drop in demand is causing steel prices to slip globally. Yet many nations are pushing for major construction projects. For example, the Infrastructure Investment and Jobs Act (IIJA) of 2021 set aside $1.2 billion in funds to stimulate the economy.
At the same time, Ternium’s top markets include Mexico (54%), Argentina (20%) and Brazil (10%). Yet the company has a growing presence in the USMCA region.
Keep reading to learn more about TX stock.
Is the Trend Changing?
Despite nagging inflation and rising interest rates, there’s reason to believe steel prices can bounce back. For one thing, the U.S. is pouring money into infrastructure. The IIJA funds projects such as building roads, bridges and improving the electric grid.
Moreover, it promotes clean energy use through EVs and a charging network. Not to mention the Federal Highway Administration’s (FHWA) $52 billion to fix the nation’s highways. With this in mind, these projects all require massive amounts of steel.
So, why are we not seeing demand rise yet? For one thing, the funds are still being given out. For example, a recent White House briefing shows over $110 billion for over 4,300 projects.
Although the U.S. only accounts for 8% of Terenium’s steel shipments, it could see higher demand going forward. On top of this, Latin America (LA) is a developing area. The company’s three biggest markets are also the biggest by GDP.
- Brazil: $1.4 trillion
- Mexico: $1 trillion
- Argentina: $388 billion
It may not seem significant compared to the U.S GDP of $23 trillion. But there is a growing opportunity within these nations for development.
TX Stock Analysis
After bottoming out at around $9 a share during the pandemic, TX stock raced to an ATH over $56 per share. But after gaining over 530%, Ternium stock peaked in August last year.
Since then, TX stock price has been trading between $36 to $50 a share in a choppy range. Yet, share prices have fallen back to support in the past month at around $36. With this in mind, the war in Ukraine and inflation are already being felt in the steel industry.
Net sales fell 1% in the first quarter, but operating income slipped 22%. Furthermore, lower steel prices and higher material costs led to shrinking margins.
Meanwhile, Ternium expects growth to pick up in Q2 with higher steel prices. The company says the war in Ukraine is making it hard to find materials, driving steel prices up at the end of the quarter.
If steel prices stabilize, as the company expects, we should see margins bounce back. At the same time, TX stock sits below all its moving averages, showing weak momentum.
If TX stock can hold support, we may see buyers stepping in. However, there are a few risks to be aware of before buying.
Risks to Be Aware Of
The steel market usually follows economic activity. Higher activity means more building and, as a result, higher steel demand.
But higher material costs are starting to cut into margins. On top of this, rising interest rates can slow project activity. With this in mind, the next few quarters will be critical.
Most important, a downturn in economic activity can lead to a recession. If this happens, steel could see demand fall significantly. In particular, emerging nations like Terenium’s biggest markets could feel the effects.
The Economic Commission is lowering its projections for growth in the area. The organization says inflation and higher unemployment are the reason for lower growth.
Furthermore, Ternium faces stiff competition. If other steel companies produce too much, it can lead to a drop in prices.
Is TX Stock a Buy?
As I have shown, TX stock is sitting on critical levels of support. If shares fail to hold support, we can see a break lower.
Yet compared to the market, Ternium already looks undervalued. For example, TX stock has a forward P/E of 2.85 while Price-to-Sales (P/S) is 0.45.
At the same time, the average price target is $54, showing a 45% upside. Sitting at the lower end of the price target range is a tempting buy. But, with growing concerns of a recession and higher costs, TX stock can see lower lows.
Although this may be true, TX stock currently offers a dividend yield of over 6.8%. With China reopening and a limited supply, Ternium could see a boost in profits with higher prices.
To achieve this, the company will need to overcome big hurdles. Rising inflation will be a problem, especially in emerging markets. Until we see more around economic growth, TX stock can be at risk.