If adversity can be said to harden the resolve of the greatest competitors, then the mettle of this manufacturer is forged in solid steel.
One of the three main subsidiaries of multi-national steelmaker Ternium (NYSE: TX ) was nationalized this year by Venezuela as part of President Hugo Chavez's broader march toward socialism. Despite the abrupt loss of the Sidor subsidiary, Ternium turned in results for the second quarter that showed how it rose through the adversity.
Net sales rose 22% from the first quarter, operating income rose 68%, and net income rose only 3% as no gains from the discontinued Sidor operations were recorded for the second quarter. Although the company expects some margin contraction in the third quarter, the EBITDA margin rose from 24% in the first quarter to 30% in the second quarter.
Further adversity may lie ahead for Ternium, as the company projects some weakening of steel prices in North America for the second half of 2008. Ternium derived about 80% of its revenue in the second quarter from the North American market, so the price outlook for this region matters to the company's bottom line. Meanwhile, U.S. steelmakers like Schnitzer Steel (Nasdaq: SCHN ) and Nucor (NYSE: NUE ) are pursuing lower production costs through a focus on scrap metal as feedstock.
While I admire the gumption Ternium exhibited by weathering the loss of a major subsidiary, I continue to view geography as a key consideration for this company. While Companhia Siderurgica Nacional (NYSE: SID ) at last check derived two-thirds of its revenue from the domestic Brazilian market, Ternium looks North to a struggling U.S. economy. For its direct access to steel-hungry Asia, Korea's POSCO (NYSE: PKX ) may have the most formidable geographical advantage of them all.