Nearshoring And New Facilities Will Expand Steel Production Capacity By 2026

Key Takeaways

• Increasing production capacity with new facilities in Pesqueria will drive future revenue growth by meeting steel demand in key industries.
  
• Nearshoring trends and infrastructure projects in Mexico create growth opportunities through higher shipments and reduced energy costs.
  
• Declining steel prices, import pressures, ambitious capex, and regulatory risks threaten Ternium's margins, cash flow, and competitiveness.

Catalysts

Manufactures and distributes steel products in Mexico, Southern Region, Brazil, and internationally.

• Ternium's plans to increase production capacity with new galvanized line and cold rolling mill in Pesqueria starting in late 2025 and early 2026 are catalysts for future revenue growth by meeting the demand for high-quality steel in automotive and appliance industries.
  
• The anticipated recovery in Mexican public infrastructure projects, coupled with the consistent rise in automotive production, presents opportunities for increased shipments and revenue growth in that region.
  
• Ongoing nearshoring trends, as recognized by Mexico's new administration, can drive Ternium's revenue growth as industrialization and import substitution boost domestic steel demand.
  
• The new slab facility in Pesqueria, anticipated to start by mid-2026, is expected to enhance operation efficiency and reduce dependence on external suppliers, likely improving net margins through cost savings.
  
• The initiation of Ternium's wind farm in Argentina, aiming to operate by early next year, will reduce reliance on external energy sources, potentially lowering operational costs and positively impacting net margins.

Ternium Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ternium's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 6.0% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $6.28) by about January 2028, up from $79.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.7 billion in earnings, and the most bearish expecting $1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.6x on those 2028 earnings, down from 72.1x today. This future PE is lower than the current PE for the US Metals and Mining industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.96%, as per the Simply Wall St company report.

Ternium Future Earnings Per Share Growth

Risks

• Declining realized steel prices in key markets have already resulted in decreased margins, which could pose a risk to future earnings if this trend continues.
  
• In Brazil, the significant increase in flat steel imports, particularly from China, despite efforts to implement tariffs and quotas, could depress local prices and impact Ternium’s revenue and margins.
  
• The seasonal decrease in steel shipments in Mexico and Brazil during the fourth quarter may result in lower revenue and affect profitability in the short term.
  
• The ambitious capital expenditure plan, particularly with $2.3 billion planned for 2025, could strain financial resources and affect free cash flow, potentially impacting the company's ability to maintain its dividend policy.
  
• Concerns about higher taxation and potential trade renegotiations in North America following a change in the U.S. administration pose regulatory risks that may affect Ternium's operations and competitiveness, potentially impacting future revenues.

Valuation

• The analysts have a consensus price target of $43.18 for Ternium based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $53.0, and the most bearish reporting a price target of just $33.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $20.5 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 8.0%.
• Given the current share price of $29.13, the analyst's price target of $43.18 is 32.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.