Tenneco Remains Neutral

We are reiterating our “Neutral” recommendation on Tenneco Inc. (TEN - Analyst Report). The company continues to benefit from tighter emission regulations along with consistent performance in the commercial business segment. However, we are concerned about the prevailing customer concentration risks faced by the company.

Tenneco’s business grows from its diversified platform mix, including top selling trucks in North America and top selling passenger vehicles in the overseas markets. The company is planning to launch multiple programs with 13 different commercial vehicle customers – truck and engine manufacturers. This will help Tenneco to meet new emission regulation laws both for on and off-road commercial vehicles.

The company’s Emission control segment will have a favorable impact from strict emission regulations through 2015. It anticipates that a 5-year average compound annual original equipment (OE) revenue growth rate will range between 18% and 20% in 2014. The growth is a result of the implementation of emission regulation globally.

However, Tenneco is under threat due to customer concentration. General Motors Company (GM - Analyst Report) and Ford Motor Co. (F - Analyst Report) contributed 19% and 15%, respectively, to total sales in 2011. About 50% of aftermarket sales were generated from the top ten customers last year.

Besides, the company’s sales suffered in 2011, due to price concessions demanded by automotive retailers such as AutoZone Inc. (AZO - Analyst Report) and Advance Auto Parts Inc. (AAP - Analyst Report). Aftermarket parts demand was also weak for Tenneco compared to the original equipment demand.

The company witnessed a 5% growth in profit in the first quarter of 2012 that recorded $41 million or 66 cents per share compared with $39 million or 63 cents a year ago, missing the Zacks Consensus Estimate by 7 cents. Revenues surged 9% year-over-year to $1.9 billion in the quarter. The hike was due to the company’s strong customer base, higher OE light vehicle production volumes, incremental commercial vehicle revenues and increased revenues from North American aftermarket.

Tenneco, based in Lake Forest, Illinois, is a leading manufacturer and supplier of emission control, ride control systems, and systems for the automotive original equipment manufacturers (OEMs) and the aftermarket. It operates 84 manufacturing plants and 15 engineering facilities worldwide, which are strategically positioned to meet local customer demand. Worldwide, the company serves more than 64 different OEMs. It competes with Meritor Inc. (MTOR - Analyst Report).

Our long-term recommendation is backed by a Zacks #3 Rank, which translates into a short-term (1 to 3 months) “Hold” rating.