The Business of Value Investing.pdf

More Than One Way to Find Value 211

This equated into 2007 EBITDA of $ 2.2 billion. The IMSA acquisi-

tion would add 3 million tons of capacity, but with the sale of the

U.S assets, capacity will be slightly reduced. In addition, Ternium is

undergoing its own capital expansion that should increase capacity

by 2 million tons in three years. In fi ve years, tons sold should eas-

ily approach 14 to 15 million, or less than 10 percent growth a year.

At an average EBITDA of $ 160 per ton, some 30 percent less than

Ternium ’ s current level, this would produce an EBITDA of $ 2.24 to

$ 2.4 billion. At 8  to 10  EBITDA, a very reasonable buyout mul-

tiple for any strategic buyer, Ternium would be worth between $ 17

and $ 24 billion, or $ 85 to $ 120 a share.

With the global economy in full recession mode in 2008 and the

beginning of 2009, steel prices have collapsed, and steel companies

Table 10.3 Discounted Cash Flow of Ternium Steel

Year Free Cash Flow ( $ billions) PV of FCF at 10%

2008 $ 1.10 $ 1 billion

2009 $ 1.21 $ 1 billion

2010 $ 1.33 $ 1 billion

2011 $ 1.46 $ 1 billion

2012 $ 1.61 $ 1 billion

Sum of PV of FCF $ 5 billion

Terminal value $ 16 billion $ 10 billion

Intrinsic value of company $ 15 billion

Shares outstanding 200 million

Intrinsic value per share $ 75

Shares outstanding

 10% increase

220 million

Intrinsic value per share $ 68

Current share price ~ $ 30

Margin of safety > 100%

CH010.indd 211CH010.indd 211 9/2/09 11:50:56 AM9/2/09 11:50:56 AM