Morningstar | TEN Updated Forecasts and Estimates from 10 May 2019
Narrow-moat-rated Tenneco, which supplies emissions control, suspension, and powertrain components and modules to the global automotive industry as well as aftermarket parts, reported disappointing first-quarter diluted earnings per share before special items of $0.52, missing by a country mile the $0.95 consensus estimate and down $1.56 versus last year. While revenue jumped 74% to $4.5 billion, including recently acquired Federal-Mogul, adjusting for currency, acquisitions, and divestitures, organic revenue increased 1%, representing an 8-percentage-point outperformance versus the 7% decline in global light-vehicle production.Management lowered 2019 revenue guidance to $17.7 billion-$18.1 billion from $18.2 billion-$18.4 billion. Adjusted EBITDA margin (excluding pass-through catalytic converters and special items) is now expected to be 10.0%-10.6%, down from prior guidance of flat with the prior year's 10.6%. Management also said that it is postponing the spin-off of DRiV to mid-2020 from the second half of 2019, allowing additional time to integrate the respective businesses and deleverage the balance sheet while the operating environment remains unfavorable.
In our opinion, the market overreacted to the May 9 news, selling shares down by a whopping 37%. We think the market has unfairly punished Tenneco's valuation for what we view as transient issues. While postponing the spin-off indicates integration difficulties, we have already assumed as much in our Stage I forecast. Our 2019 revenue estimate was $18.2 billion, and our adjusted EBITDA margin assumption was already 10.5%. Lowering our 2019 revenue estimate to $17.9 billion with an adjusted EBITDA margin of 10.0%, while maintaining our normalized sustainable midcycle 11.2% margin assumption, caused little variance in our enterprise value. This 5-star-rated stock trades at a compelling 83% discount to our $73 fair value estimate.
During the past 10 years, Tenneco's high, low, and median adjusted EBITDA margin has been 12.5%, 9.2%, and 11.7%, respectively. Including catalytic converter pass-through business, Tenneco's and Federal-Mogul's EBITDA margins before acquisition were roughly comparable around 9.5%. With cost synergies identified by management, we estimated that the new entity's EBITDA margin would expand to 10.5%. Even so, we maintained a 10.0% peak margin in 2021 and a 9.5% normalized sustainable midcycle assumption in year five of our Stage I forecast. Excluding catalytic converter pass-through business, our EBITDA margin peaks at 11.8% versus Tenneco's 10-year historical 12.5% high, and our normalized sustainable margin of 11.2% represents a 50-basis-point contraction versus the 10-year historical median.
Our investment thesis on the shares of Tenneco is intact. We expect organic revenue to grow at 4-6 percentage points greater than our long-term global light-vehicle demand growth rate forecast of 1%-3%. The company benefits from tightening clean air standards for vehicle emissions and from increasing demand for electronically controlled suspension. The growth of advanced driver-assist systems, along with the digitization of the passenger vehicle, enables an opportunity for Tenneco’s ride control group to capitalize on the need for suspension systems to interact electronically with ADAS. As world governments drive the use of more ADAS through European New Car Assessment Programme safety ratings, we expect automakers’ demand for Tenneco's intelligent suspension products to outpace global vehicle production growth.
Tenneco designs, manufactures and sells products and services for light vehicle, commercial truck, off-highway, industrial and aftermarket customers. As a parts supplier, the company produces individual component parts for vehicles as well as groups of components that are combined as modules or systems within vehicles. These parts, modules, and systems are sold to the light vehicle and commercial truck manufacturers as well as aftermarket customers, including independent warehouse distributors, distributors, engine rebuilders, retail parts stores, mass merchants, and service chains. The company operates in four segments, consisting of the following: Clean Air, Powertrain, Motorparts, and Ride Performance.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.