We are reiterating our Neutral recommendation on Tenneco Inc. (TEN). The leading maker of emission control and ride control systems benefits from tighter emission regulations and rising commercial vehicle business. However, the company remains exposed to customer concentration risks.
Tenneco, in the second quarter of 2012, registered a 40% increase in profit (excluding special items) to $70 million or $1.14 per share from $50 million or 81 cents in the comparable quarter last year. The results also breezed past the Zacks Consensus Estimate by 17 cents.
Total revenue increased marginally to $1.92 billion, but failed to match the Zacks Consensus Estimate of $2.04 billion. The year-over-year growth was attributable to a rise in production of light vehicles in North America and China along with higher commercial vehicle revenues around the world.
The company performed well with its top-selling light trucks in North America and top-selling passenger cars overseas. It further expects to benefit from the launch of multiple programs with 13 different commercial vehicle customers including truck and engine manufacturers to help customers comply with the new emission regulations for on and off-road commercial vehicles. The customers include Caterpillar Inc. (CAT), Navistar International Corporation (NAV) and Daimler AG (DDAIF).
New emission standards will have a positive impact on the company’s Emission Control segment. The new emission regulations will likely boost original equipments (:OE) revenues by 18% to 20% through 2014. In addition, the company expects revenues to benefit significantly from strong growth in North American vehicle production.
However, Tenneco remains under pressure from forced pricing concessions by automotive retailers like AutoZone Inc. (AZO) and Advance Auto Parts Inc. (AAP). In addition, customer concentration from the company’s top 10 aftermarket customers involving General Motors Company (GM) and Ford Motor Co. (F), poses a threat to the company, as they constitute 50% of total aftermarket sales.
Softness in demand for aftermarket parts compared to OE is also challenging for the company. The replacement cycles of the aftermarket products are longer owing to the improved quality of OE parts and higher average useful life of automotive parts.
Our Neutral recommendation on the stock is backed by a Zacks#3 Rank, which translates into a short-term (1 to 3 months) Hold rating.
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