Tenneco Beats by a Penny - Analyst Blog

Tenneco Inc. (TEN) recorded a profit of $24 million or 39 cents per share (before special items) during the third quarter of 2010, which was significantly up from $3 million or 7 cents per share in the same quarter of previous year. However, the company's profit barely exceeded Zacks Consensus Estimate by a penny during the quarter.

Revenues in the quarter rose 23% to $1.54 billion on the back of higher original equipment (OE) production volumes across all the regions (especially in North America) and strong aftermarket sales globally.

Excluding substrate sales and the negative impact of $22 million due to fluctuations in currency, revenue went up 20% to $1.2 billion. Adjusted EBIT (earnings before interest, taxes and non-controlling interests) scaled up 64% to $77 million from $46 million in the third quarter of 2009.

Gross profit increased by $51 million to $262 million (17% of sales) from $211 million (16.8% of sales) in the third quarter of 2009. The improvement was attributable to strong OE production volume and efficiencies in the manufacturing process.

Regional Performance

In the North American market, OE revenues escalated 38% to $590 million driven by strong volumes from Ford Motor's (F) F-150 and Super-Duty pick-ups, and General Motor's (MTLQQ) crossover models and the GMT900 platform. Aftermarket revenue rose 15% to $172 million on the back of higher sales volumes. EBIT increased to $51 million from $28 million a year ago.

In the European market, OE revenues grew 11% to $380 million supported by Ford's Focus and Mondeo, Volkswagen's Polo, Opel Astra, and the Daimler AG's (DDAIF) Sprinter. However, aftermarket revenues in the region dipped 5% to $90 million.

In South America and India, revenues surged 38% to $143 million, driven by higher improved OE volumes. EBIT for the Europe, South America and India region increased by $5 million to $15 million in the third quarter of 2009.

In the Asian market, revenues hiked 25% to $127 million, driven by higher OE volumes in China, particularly on GM, Volkswagen and Audi platforms. In the Australian market, the company generated revenues of $40 million, up 16% from the year-ago level led by higher OE production volumes. EBIT in the Asia-Pacific region rose marginally by $3 million to $11 million.

Financial Position

Tenneco had cash and cash equivalents of $184 million as of September 30, 2010, an increase from $167 million as of December 31, 2009. Long-term debt increased to $1.23 billion from $1.15 billion as of December 31, 2009.

In the first nine months of the year, Tenneco's cash flow from operations deteriorated to $64 million from $108 million despite an improvement in income. This was mainly attributable to increases in accounts receivable and inventories.

Capital expenditures increased to $105 million from $86 million a year ago. This was attributable to Tenneco's investments in light and commercial vehicle customer programs, vehicle launches by original equipment manufacturers (OEMs), and expansion in emerging markets including China, India and Thailand.

As of September 30, 2010, Tenneco's leverage ratio – net debt to adjusted EBITDA including non-controlling interests – reduced to an all-time low of 2.2X from 5.0X as of September 30, 2009.

Our Take

Tenneco is a Lake Forest, Illinois-based leading manufacturer and supplier of emission control, ride control systems, and systems for the automotive OEMs and the aftermarket. The company has many program awating in its pipeline.

Beginning in the fourth quarter 2009 and through 2011, the company has been launching programs with 11 different commercial vehicle customers in order to meet new diesel emission regulations in China, North America, Europe and South America. This along with a strong recovery in OE production volumes will continue to drive the company's earnings.

However, the company faces weak demand for aftermarket parts compared to OE. Besides, pricing pressure from OEMs remains a problem for Tenneco. As a result, the company retains a Zacks #3 Rank (Hold) on its stock.