Terniun is expected to perform better in the year ahead, helped in part by moves to bring supply chains closer to the U.S., according to Morgan Stanley. Analyst Carlos De Alba upgraded the stock to overweight from equal weight and increased his price target to $52 from $34. De Alba’s new target implies an upside of 15.6% from Friday’s close. “We think TX shares will continue to work as profitability inflects higher,” he said in a note to clients Sunday. “We believe Ternium’s profitability has reached an inflexion point, which historically has proven a good entry point for the stock.” De Alba said the stock should perform well in the next year following a bottom in profitability, which he said should have hit in the fourth quarter of 2022. Its EBITDA per ton likely also bottomed in the quarter, he said, and is historically higher than both U.S. and Latin American peers. The stock is his top pick in metals and mining within Latin America. He also said the stock’s underperformance compared to American peers over the last year is unjustified given it typically delivers above-average profitability. Going forward, he said the stock will be a beneficiary as companies try to bring their supply chains closer to where they are located, a trend dubbed “nearshoring.” Investments into re-rolling capacity in Mexico, paired with further plans to expand downstream capacity, can help Ternium win business with more U.S. companies looking to Mexico as an alternative to China, he said. He said Ternium’s plans for a new mill for electric arc furnaces, which are used to produce steel, help improve clarity around capital allocation. It was not a surprise to market participants despite the likelihood that it will weigh on free cash flow and create higher expenditures in the coming years, De Alba added. That’s because management previously mentioned needing expanded production to comply with a rule for the U.S., Canada and Mexico requiring steel used in the auto industry be melted and poured in the region that goes into effect in 2027, he said. The new mill is not expected to impact the stock’s dividend, which De Alba said is at an attractive level. Ternium should also still be able to end upcoming years with a net cash position despite the investment. The stock is up 47.3% this year through Friday’s close, reversing course after losing 29.8% in 2022. — CNBC’s Michael Bloom contributed to this report.
