JP Morgan Comments On Ternium, Remains Its Top Steel Pick

JP Morgan is revising its estimates for Ternium TX on the back of 4Q earnings, mark-to-market for higher raw material prices, higher steel prices, and the stake sale by Usiminas. JPM now expects '11e and '12e EBITDA at $1.9B, ~1% lower vs. previous estimates and +8%/in line vs. consensus. JP Morgan has a Dec'11 price target of $51.50, implying potential upside of 43%. Trading at 4.2x and 4.1x ‘11e and ‘12e EBITDA, vs. peers' average of 6.9x and 5.6x, respectively, TX is a deep value story, and remains our top pick within the steel space. As a reference, its model suggests that the current share price implies an EBITDA of $150/t vs. normalized level of close to $200/t, and $178/t in 2010, which JP Morgan believes was below normal driven by depressed steel prices. Potential catalysts on the horizon are 1Q earnings during May'11, when JPM expects the company to report solid results and guide for a better 2Q. Ternium has traded at a discount of ~37% vs. its peers since its IPO in Jan'06. However, with most of the overhangs on the stock now gone, JP Morgan expects the valuation discount to its peers to narrow at least partially. TX closed Friday at $35.89