Industrias CH SAB (ICHB), Mexico’s biggest maker of specialized steel used in car engines, is missing out on a surge in automobile production as competitors’ increased output has lowered prices for the company’s core products.
Shares of Industrias CH have plummeted 15 percent this year to 74.87 pesos, the fourth-biggest drop among 35 stocks on Mexico’s benchmark IPC index, after sales slid 14 percent in 2013 and earnings before interest, taxes, depreciation and amortization tumbled 32 percent to 2.7 billion pesos ($207 million). Sales from the past 12 months fell 7 percent compared with the prior period, and eleven of 12 analysts surveyed by Bloomberg have sell or hold ratings on the stock that is posting its worst performance since 2008.
Industrias CH, whose customers include Chrysler Group LLC and Honda Motor Co. (7267), capped prices amid heightened competition even as costs rose and Mexico’s auto production climbed 7.9 percent in June from a year earlier, said Rodrigo Garcilazo, an analyst at Corporativo GBM. (GBMO) Increased output by competitors such as Gerdau SA (GGBR4) and Nucor Corp. (NUE:US) will produce a glut that will hamper Tlalnepantla, Mexico-based Industrias CH’s growth this year as specialized steel bars known as SBQ will grow 35 percent this year in North America, according to Garcilazo.
Shares of Industrias CH rose 1.3 percent, the most since July 4, to 75.58 pesos at the close of trading in Mexico City. A spokeswoman for Chrysler in Auburn Hills, Michigan, and a spokesman for Honda in Torrance, California, didn’t immediately respond to an e-mail and phone calls requests for comment on the lower sales.
Mexico is poised to overtake Brazil as the top Latin American automobile producer for the first time in more than a decade as surging exports to the U.S. spur factory openings and record output. Mexico’s ascent is being fueled in part of auto sales running at the fastest pace in almost eight years in the U.S., the country’s largest market. The boom coincides with a slump in Brazilian output through June as domestic demand cools.
“The oversupply in the industry will result in pressure on the prices of SBQ,” Garcilazo said in a phone interview from Mexico City. “There will be more demand in the automotive industry and in Mexican plants, but the production of SBQ will increase significantly creating an oversupply for some years.”
Specialized steel accounted for 62 percent of Industrias’s $8 billion in first quarter sales, according to the company’s April 30 filing to the Mexican Stock Exchange. Production of specialized steel, which makes up 60 percent of the demand in the automotive industry, is expected to increase by 3 million tons this year to meet heightened demand, according to Garcilazo.
Industrias CH declined to comment ahead of the company’s second-quarter earnings report scheduled for late July, Jose Luis Tinajero, the company’s head of investor relations, said in a phone interview. The company is identifying the opportunities that will allow it to improve its position in the American market and continue diversifying its product line, Industrias CH said April 30 on its website.
Industrias CH, which has 25 steel production plants in Mexico, the U.S. and Canada, supplied about 40 percent of the specialized steel bars in Mexico and 20 percent in the U.S., according to the company’s website. An estimated 35 percent of Industrias CH’s products were sold outside of the Mexico, principally in the U.S.
Share prices of Grupo Simec SAB (SIMECB), an Industrias CH unit that manufactures and processes steel products for the automotive and mining industries, contrast with the parent company. Grupo Simec has climbed 22 percent in the last year, the best performance compared with 16 industry peers tracked by Bloomberg, while Industrias CH’s stock has tumbled 8.5 percent during the same period.
Grupo Simec’s shares “are flying” in recent weeks and have climbed 17 percent this year, according to Federico Robinson, an analyst at Actinver SA in Mexico City. The reason for the divergence is in valuation of the stocks, he said.
“Historically, Industrias CH has been more expensive than Grupo Simec,” said Robinson, who has a sell rating on Industrias CH and a hold rating on Simec, in a phone interview. “Apparently market memory has punished that fact.”
Grupo Simec is also benefitting from market speculation that the company will be added to Mexico’s benchmark IPC index, said Fernando Bolanos, a Monex Casa de Bolsa mining and industrial analyst.
“Speculation that Simec will join the IPC has resulted in increased demand and appreciation of the shares,” Bolanos, who has a sell rating for both Industrias CH and Grupo Simec, said in a phone interview from Mexico City.
Industrias CH, which acquired an 82.5 percent stake in Grupo Simec in 2001, owns 56 percent of the company’s shares, according to data compiled by Bloomberg. Guadalajara-based Grupo Simec is Industrias CH main subsidiary and represented 91 percent of net sales in 2010.
President Enrique Pena Nieto announced plans in April to invest 7.75 trillion pesos in infrastructure and energy investment by 2018. The investment boom, which includes 3.3 trillion pesos in energy projects, will provide opportunities for Industrias CH, according to Actinver’s Robinson.
“Many of the new plans for pipelines and construction will require high steel demand,” he said. “The benefits to Industrias CH might not be seen this year, but by 2015, the company should start to see more investment opportunities.”
Increased earnings for Industrias CH, which has boosted production to more than 6 million tons in 2014 from 70,000 tons in 1991, probably won’t happen this year, according to GBM’s Garcilazo. GBM forecasts a 13 percent slide in the company’s Ebitda in 2014 as sales rise 10 percent. Industrias CH’s Ebitda fell 13 percent in the first quarter.
“We are still expecting negative margins this year,” Garcilazo said. “The company’s stocks are likely to fall some more this year before seeing any pick-up from new projects.”
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