The Inflection Point's  Instablog

As markets corrected yesterday, steelmaker Ternium (TX) spent most of the day moving steadily higher, making a continuous series of higher highs and higher lows as it finished up $5.16 to $15.67.  Volume surged 1200% above its average daily volume.  Amazingly, Hugo Chavez is to be thanked for all of this.

About a year ago, Chavez announced that he would be nationalizing Sidor, a company in which Ternium held a 59.7% interest in.  Markets had been expecting a long, drawn out process before this nationalization would be completed and before Ternium would be getting payment for its stake in Sidor.  Most analysts pegged Ternium’s stake in Sidor to be worth $1.6 Billion and deemed the nationalization process to be a distracting one for Ternium, one that would create an overhang on its stock.  Yesterday, this overhang was lifted in a big way.

An agreement on the compensation value for the expropriated assets was announced early Thursday, with Ternium set to receive a total of ~$2 Billion in the next 18 months.  TX received the first tranche of the $2B yesterday, with remaining values to be paid in two tranches in the next 5 months.  Markets were very happy with this agreement, as it eliminates TX’s exposure to Venezuela and makes the company a simpler one to analyze with its exposure to just two Latin American countries, Mexico (80% of EBITDA) and Argentina (20% of EBITDA).

This morning Ternium was upgraded by both J.P. Morgan and UBS.  Respective price targets were moved up considerably to $25.5 and $25.  J.P. Morgan analyst Rodolfo R. De Angele makes the case that the stock is still cheap, even after yesterday’s ~50% share price appreciation.  He states that the stock is still only trading for 6.3x and 3.1x 2009e and 20010 e EV/EBITDA, well below Latin competitors which trade for 8.5x and 6.6x.  He is also impressed with TX’s free cash flow yields of 30% in 2009 and the fact that the company will now be debt-free by 2010. 

Of note, Deutsche Bank also changed its rating on TX to a hold from a sell and lifted its price target to $14, up from its previous target of $6.  Interesting to note that TX’s stock is already 10% above this PT, implying that there could be another upgrade and price target revision from Deutsche Bank in the coming months.

With the stock blowing right through the 200 day moving average yesterday on a huge surge in volume and with these upgrades this morning, TX’s stock seems to have a quick runway to $19-21 in the next few months as investors reacquaint themselves with the story and as the steel sector receives new inflows.

I plan on selling part of my position this morning into these upgrades and to then make the remaining position a small core position for my accounts as it works up to my trading target in the high teens to the low 20’s.

Disclosure:  The author is long and will be taking some of his position off of the table this morning and letting the remaining stake ride until it works to the high teens and low 20’s….