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Tenneco Inc Class A TEN

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Morningstar’s Analysis

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Tenneco Shows Continued Improvement With Solid Q2 Results, Fine-Tunes 2021 Guidance

Richard Hilgert Senior Equity Analyst

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.

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Company Profile

Business Description

Tenneco's emissions-control products meet strict air-quality legislation, optimize engine performance, improve fuel economy, and acoustically tune engine sound to fit a vehicle's profile. Ride-control products enhance safety by enabling improved steering, braking, and acceleration as well as ride comfort. Champion, Fel-Pro, Moog, Monroe, and Walker are some of Tenneco's well-known aftermarket brands. In 2020, 40% of revenue came from North America, 37% from Europe, 18% from China, and 5% other regions.

500 North Field Drive
Lake Forest, IL, 60045
T +1 847 482-5000
Sector Consumer Cyclical
Industry Auto Parts
Most Recent Earnings Jun 30, 2021
Fiscal Year End Dec 31, 2020
Stock Type Cyclical
Employees 73,000