Tenneco Has Bought Itself Breathing Room, But Remains A High-Risk Call

For some time, I’ve been referring to Tenneco (TEN) as a “binary outcome” with this highly-leveraged auto and commercial vehicle supplier either threading the needle and finding a way to cut costs and improve cash to manage its heavy debt load, or stumbling and running out of liquidity and time.

So far, management continues to execute, delivering better than expected cost leverage in 2020 and better guidance for 2021. These shares have risen another 40% since my last update in August, performing quite well relative to most auto suppliers, though not as well as Dana (DAN) (which I preferred back in August).

At this point modeling Tenneco is still very difficult as the heavy debt load leads to a wide range of outcomes on comparatively small changes in modeling assumptions – a 10bp change in my EBITDA margin estimate for ’21 drives a $2/share swing in my margin-driven EV/revenue valuation model. Likewise, small changes in modeling assumptions driving free cash flow (like inventory turnover or receivables turnover) lead to big swings in fair value.

I do see a path to a significantly higher share price, but I also have significant doubts about Tenneco’s long-term competitiveness, with little leverage to BEVs and likely declines in its core powertrain and emissions businesses over time. Aggressive investors may be able to ride these shares into the mid-teens, possibly even toward $20, but it’s hard to be too bullish about a company that I think is on the wrong side of major trends in its industry.

 

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Tenneco Has Bought Itself Breathing Room, But Remains A High-Risk Call