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Tenneco (TEN) Down 64% Over a Year: Dismal Run to Continue?

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Tenneco Inc. (TEN - Free Report) appears to be in hot water as it is grappling with increased expenses and heavy debt load. Challenging market conditions, resulting in weak vehicle production volumes, have been weighing on the OEM auto supplier. These factors have clearly dented investors’ sentiments, as this Zacks Rank #5 (Strong Sell) stock has plummeted 64% over the past year against the industry’s growth of nearly 13.2%. Moreover, the Zacks Consensus Estimate for fiscal 2019 and 2020 has moved south over the past 30 days from $3.76 to $3.48 and $4.62 to $4.33, respectively.

That said, let’s delve deeper into the factors that have put Tenneco in bad shape.

Tenneco in Doldrums

Concerns related to economic slowdown have been dampening demand for vehicles, thereby affecting Tenneco’s performance. Weak vehicle production, and unfavorable volume and customer mix have adversely impacted the company’s top line. The firm forecasts drop in light-vehicle production and a slight decline in commercial vehicle markets, which will negatively affect the upcoming results. As such, it has downwardly revised its full-year 2019 sales and profit guidance, dampening investors’ confidence. The firm now expects sales in the band of $17.25-$17.35 billion, down from the prior forecast of $17.6-$17.8 billion. Adjusted EBITDA is expected within $1.42-$1.44 billion, down from the previous view of $1.51-$1.56 billion.  

Pricing pressure from OEMs remains a concern for Tenneco. The company largely depends on a few customers in the OEM segment, including General Motors (GM - Free Report) and Ford (F - Free Report) — which had accounted for 24% of net sales in 2018. In fact, Tenneco expects six-week long GM-UAW strike to negatively impact EBITDA by $35 million in the fourth quarter of 2019.

The company has been bearing the brunt of high operating expenses over the last several quarters. High cost of raw materials and increasing SG&A expenses are clipping the firm’s margins, and the trend is likely to continue. Moreover, high debt-to-capital ratio of 70% further restricts Tenneco’s financial flexibility to tap on growth opportunities.

Operational inefficiencies related to manufacturing footprint actions, which are underway in North America and China for the Ride Performance segment, have hampered profits of Tenneco’s DRiV. Further, escalating U.S.-Sino trade tensions have been impacting the company’s performance. While a partial trade deal is currently being worked out between the two nations, new tariffs are likely to go into effect if no agreement is in place. The possibility of the imposition of new tariffs on imports remains a concern.

While the company is undertaking several restructuring initiatives, we are yet to see if these can completely offset the aforementioned hurdles. Until then, investors can count on promising top-ranked stocks. A top-ranked stock from the same industry is BRP Inc. (DOOO - Free Report) , which surpassed earnings estimates in each of the trailing four quarters.You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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