Ternium Is Up 50% In 2016, Leading Morgan Stanley To Pump The Brakes

Ternium SA (ADR) TX shares are up 50 percent year-to-date and have [in USD] outperformed the Mexican market by 49 percentage points, Latam MSCI by 33 percentage points and Mexican steel peers by 16 percentage points.

Morgan Stanley’s Carlos De Alba downgraded the rating for the company to Equal-Weight, with a price target of $20, saying that there is limited upside for the shares in the near future.

Argentina Margins Set To Contract in 2H16

Analyst Carlos De Alba expects Ternium’s margins in Argentina to contract in 2H16 owing to higher costs and lower volumes. The company’s EBITDA margins in Argentina expanded from 12 percent in 3Q15 to 17 percent in 4Q15 and to 27 percent in 1Q16.

High inflation in Argentina is expected to limit the company’s margins in 2016. “We also see volumes suffering from the economic downturn, further pressuring margins,” the analyst wrote.

Although increased competition may not have a significant impact on Ternium’s near-term performance, its impact over the longer term cannot be ignored. This may pose some headwinds to the company’s recently announced Hot Dip Galvanized steel expansion project, De Alba stated.

Although Ternium is a well-managed company, the combination of a challenging macro environment, expected margin compression in Argentina and the impact of rising competition in the Mexican market are likely to be an overhang on the stock’s future performance.