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.
ADVANCE AUTO PT (AAP): Free Stock Analysis
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AUTOZONE INC (AZO): Free Stock Analysis Report
CATERPILLAR INC (CAT): Free Stock Analysis
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DAIMLER AG (DDAIF): Free Stock Analysis Report
FORD MOTOR CO (F): Free Stock Analysis Report
GENERAL MOTORS (GM): Free Stock Analysis Report
NAVISTAR INTL (NAV): Free Stock Analysis Report
TENNECO INC (TEN): Free Stock Analysis Report
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