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Tuesday February 21, 2012
Ternium : A Peter Lynch steel play
by John Reese, editor Validea  Our strategy is to select stocks based on the investing criteria of legendary investors; in this case, Ternium SA (TX) earns a 100% score based on our Peter Lynch screen.Ternium is a company in Latin America that makes steel products for the construction, home appliances, capital goods, container, food, energy and automotive industries. About 57% of sales were generated in North America and 41% in South and Central America. Under this strategy, the investor should examine the P/E (9.66) relative to the growth rate (29.91%), based on the average of the 3 and 4 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for TX (0.32) is very favorable. In addition, its P/E of 9.66 is considered acceptable. When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Since inventory to sales has decreased from last year by -0.77%, TX passes this test. This methodology also favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for TX is 29.9%, based on the average of the 3 and 4 year historical eps growth rates, which is acceptable. A bonus for a company in the Lynch strategy is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for TX (39.92%) is high enough to add to the attractiveness of this company. Learn more about this financial newsletter at John Reese's Validea. Related articles:
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