Increasing Ternium Position Going Into Q1 Earnings (NYSE:TX)

We bought more of Ternium (NYSE:TX) this week as the company gears up for its first quarter earnings numbers which are to be announced next week. Ironically, on the 28th of this month (next Tuesday), the firm goes ex-dividend, plus it will also announce its Q1 numbers.

That dividend (which is $1.20 annually) will be paid out to shareholders on the 5th of May. So, basically, there is a calendar week between the ex-dividend date and the payment date. This is attractive from a trading standing, especially if we want to put on an earnings trade and sell premium which will expire in the regular May cycle.

Earnings trades for us are simply a strategy to increase cash flow for our portfolio. The core focus always is on the company and its respective fundamentals.

We have written about Ternium in the past and explained why we are attracted to this stock. As outlined in other articles, Ternium and the industry in general have had significant headwinds to deal with. Then came the coronavirus pandemic and the oil shock which collapsed shares briefly to single-digit figures.

Management, though, came out a few weeks back and stated that its operating results for the first quarter are in line with previous guidance. This is bullish, given the fact that the company is still on course to more than double its bottom line this year ($2.47 per share). This means shares are trading with forward earnings multiple of just over 5, which is 100%+ lower than the average in the steel industry.

A strong valuation is one thing, but a viable dividend is another. Based off the company’s current share price, Ternium’s dividend comes in at a whopping 8.84%, which is almost three times the industry average. Let’s see how well the payout has been holding up during this aggressive downturn.

Over the past decade, Ternium has increased its dividend from $0.50 per share in 2010 to $1.20 per share in 2020. To more than double the dividend in this time frame is an impressive feat, especially given the fact that earnings are actually down fractionally since 2010.

Remember, though, that it is cash which creates earnings, and not the other way around. It is cash which pays the dividend, which is why we always prefer to calculate the payout ratio off cash flow, and not net earnings.

For example, from the $564 million of net income the firm generated in 2019, it was able to able to generate $1.647 billion of operating cash flow. Because $1.05 billion was paid out in capital expenditure and financing costs came to $150 million, Ternium had plenty of free cash flow ($595 million) to cover the dividend ($236 million). Furthermore, that 2019 capex number was the highest amount we have seen Ternium spend on assets for quite some time.

Therefore, when we take into account the sizable jump we should see in net profit this year, plus the fact that capex spend should come in at around $800 million, the dividend payment looks well covered going forward. That really is the point here. Once a firm is generating strong operating cash flow, management can then decide how to deploy that cash, which invariably means looking after shareholders as well as building the business.

Net interest expense at $59.2 million last year. EBIT came in at $862 million. Suffice it to say, interest bearing debt is not a huge burden on operating profit, and the trend is favourable. Shareholder equity came in at $7.7 billion in 2019, which again was the highest amount of equity we have seen in Ternium for 10+ years. The company’s decreasing net debt (which we saw in 2019) is always a favourable tailwind for the dividend over the long term.

To sum up, Ternium is a clear buy at its present price from both a value standpoint as well as a profitability standpoint. The market has punished this stock for negative growth over the past couple of years. The story is changing though at Ternium, which is why we are expecting a solid number next week. Let’s see if shares can traction post the earnings announcement.


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Disclosure: I am/we are long TX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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