Analyst Note| Richard Hilgert |
No-moat-rated Tenneco reported second-quarter adjusted EPS of $0.84, $0.05 better than the $0.79 FactSet consensus estimate and $2.99 higher than the coronavirus-pummeled year-ago period. Value-added revenue (excludes pass-through catalytic converter) surged 74% to $3.5 billion from $2.0 billion last year. Excluding currency, organic VA revenue climbed 68%. Adjusted EBITDA was $356 million for a margin of 10.2% compared with $8 million reported last year on higher volume and turnaround cost reductions. Quarter-end liquidity was healthy at $2.2 billion, including $719 million in cash and $1.5 billion available revolver. Because of operating results and more normalized working capital, second-quarter cash usage improved to $17 million, up from a $254 million cash burn last year.
Management tweaked 2021 VA revenue guidance to a range of $13.8 billion - $14.1 billion, up from the prior $13.5 billion - $14.0 billion guidance on higher material cost recoveries in the second half. Adjusted EBITDA is now forecast between $1.36 billion - $1.44 billion, tightened from the previous $1.35 billion - $1.45 billion as material recovery in the revenue line passes through at zero margin. We increased our 2021 estimated VA revenue to $14.1 billion from $13.8 billion, but our adjusted EBITDA estimate is unchanged at $1.423 billion.
Our fair value estimate will likely remain $31.50. The changes in 2021 modeling assumptions had no effect. Even though the time value of money since our last update would add 3%-4% to our fair value estimate, Morningstar’s probability-weighted 26% U.S. corporate tax rate assumption effective 2022 would offset by 3%-4%. Because of market concerns over high debt, material internal combustion engine exposure, and an operating turnaround, the shares trade at a steep 46% discount to our fair value estimate. For long-term investors willing to accept higher credit risk and a turnaround situation, we think 5-star-rated Tenneco shares offer compelling value.