Tuesday, June 4, 2019

Tenneco Pounded Down On Weak Execution, High Leverage

I wasn’t all that fond of Tenneco (TEN) when I last wrote about it in the fall of 2018, but even though I had issues with the company’s unimpressive operating performance and weak leverage to vehicle electrification, I didn’t expect the 75% drop in the share price that followed. Management credibility is arguably at an all-time low now, and with weak trends in light vehicle builds and a weakening outlook for many commercial vehicles, Tenneco’s back-end-loaded second half guidance seems perhaps ambitious even with a meaningful revision after first quarter earnings.

It’s tough to reconcile the magnitude of the share price drop with the actual underlying performance (unimpressive as it has been), but net debt is now close to 3.5x expected EBITDA and the spin-out of DRiV has been postponed by at least six months. I can understand why deep-value/contrarian investors may want to give this a look (especially as I think auto/vehicle parts stocks are undervalued as a sector), but I’m concerned about the company’s long-term competitiveness and the fact that net debt now exceeds over a decade of estimated free cash flow in my model.

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Tenneco Pounded Down On Weak Execution, High Leverage

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