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On May 10, we upgraded Tenneco Inc. (TEN - Analyst Report) to Neutral based on its strong commercial vehicle business and robust performance in the first quarter of 2013. However, we are concerned about the high customer concentration and weak demand for high-margin aftermarket parts.

Why the Upgrade?

On Apr 29, Tenneco reported a 9.1% increase in adjusted earnings per share to 72 cents for the first quarter of 2013 from 66 cents a year ago, surpassing the Zacks Consensus Estimate by 7 cents. Net income augmented 7.3% to $44.0 million from $41.0 million a year ago.

Revenues increased marginally to $1.90 billion, beating the Zacks Consensus Estimate of $1.84 billion. The year-over-year increase in revenues was attributable to higher revenues from Clean Air division, partially offset by decline in revenues from Ride Performance.

Following the release of the first-quarter results, the Zacks Consensus Estimate for 2013 increased 1.7% to $3.65 per share. The Zacks Consensus Estimate for 2014 also went up 1.1% to $4.47 per share. Currently, the company carries a Zacks Rank #3 (Hold).

The Emission Control segment of the company will have a favorable impact from tighter emission regulations through 2015, with its global market share reaching 10%. Tenneco expects to achieve a 5-year average compound annual OE revenue growth rate of 18% to 20% through 2014 with the implementation of emission regulations.

In addition, the diversified platform mix of Tenneco will lead to its business expansion. The company also plans to broaden its product portfolio, gain new business and attain a dominant position in the emerging markets through various acquisitions and alliances.

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.

Other Stocks to Consider

Currently, Denso Corp. is performing well in the same industry where Tenneco operates. The stock holds a Zacks Rank #1 (Strong Buy).

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