Tenneco Still Under-Earning And Loaded With Debt

When I last wrote about Tenneco (TEN), I thought this highly-leveraged auto, truck, and commercial vehicle parts supplier was just too much of a risk relative to the potential rewards. The shares have fallen almost 60% since then, and while I think the company may be able to squeeze through these new challenges and survive, I still see significant ongoing operating issues with a company that has long generated underwhelming margins and gone deeply into debt pursuing very questionable M&A strategies.

As I said before, given the very high leverage here, even rather modest changes in long-term growth or margin assumptions (or near-term valuation multiples) can drive a meaningful change in the prospective fair value. Change my ‘21 revenue multiple by 0.025 (from 0.375x to 0.40x) and the per-share fair value jumps almost 50%. Change a model input such that the long-term average FCF margin changes by 1bp and my DCF-based fair value can change by almost 3%.

With such high leverage, a successful restructuring and turnaround at Tenneco could drive huge shareholder returns. Likewise, with such high leverage, a single management mistake (and there have been more than a few of those over the years) could conceivably spiral the company into bankruptcy. I don’t need that kind of risk, particularly in the absence of a better restructuring/turnaround plan, and I’m not looking to buy these shares today.

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Tenneco Still Under-Earning And Loaded With Debt