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On Feb 18, we downgraded emission control and ride control systems manufacturer Tenneco Inc. (TEN - Analyst Report) to Underperform, based on its lower-than-expected fourth quarter earnings, high customer concentration and sluggish demand for high-margin aftermarket parts.

Why the Downgrade?

Despite reporting a 25% rise in adjusted profit to $40.0 million or 66 cents per share in the fourth quarter of 2012, Tenneco’s’ EPS missed the Zacks Consensus Estimate by a couple of cents. Revenues dipped 1.7% to $1.75 billion and fell short of the Zacks Consensus Estimate of $1.78 billion.

Following the release of the fourth quarter results, the Zacks Consensus Estimate for 2013 decreased 4.0% to $3.62 per share. The Zacks Consensus Estimate for 2014 also went down 2.9% to $4.40 per share. With the Zacks Consensus Estimates for both 2013 and 2014 going down, the company retains a Zacks Rank #5 (Strong Sell).

Tenneco remains under pressure as automotive retailers like AutoZone Inc. (AZO - Analyst Report) demand heavy pricing concessions. In addition, the company faces high customer concentration as the company’s top 10 aftermarket customers, including Ford Motor Co. (F - Analyst Report), constitute 50% of its total aftermarket sales.

Softness in demand for aftermarket parts compared to original equipments (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.

Other Stocks to Consider

Commercial Vehicle Group Inc. (CVGI - Snapshot Report) is performing well in the same industry where Tenneco operates. The stock retains a Zacks Rank #1 (Strong Buy).

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