An Auto Supplier Pair Trade: Tenneco And Adient

Auto suppliers by and large outperformed the consensus last quarter, and Morgan Stanley anticipates continued growth manifested in easier production comps, sequential margin expansion and free cash flow conversion.

“The results this quarter do not change our thesis that there is room for positive estimate revisions for the Auto 1.0 suppliers, and risk to the multiple for the Auto 2.0 suppliers,” the firm said in a Wednesday note.

The Ratings

Morgan Stanley’s Armintas Sinkevicius upgraded Tenneco Inc TEN to Equal-weight and cut the price target from $47 to $41. They also downgraded Adient PLC ADNT to Equal-weight and slashed the target from $81 to $61.

Tenneco Upgraded

Tenneco has fallen 20 percent since announcing its purchase of Federal Mogul and the spinoff of its aftermarket and ride performance businesses. A narrative shift has bolstered Morgan Stanley’s optimism, though.

“Our UW thesis was based on the risk that the company could issue $400 million of equity to the market, if the stock was trading above $54.68 (based on the deal terms),” Jonas said. (See the analyst's track record here.)

“However, at these levels, we believe that the company might instead deliver the shares to Icahn Enterprises.”

Adient: 'Limited Upside In The Near Term'

Morgan Stanley has become more bearish on Adient since management delineated a multiyear strategy to scale down the underperforming metals business rather than take more dramatic strategic action. Adient lowered 2018 guidance on perceived risk to the segment.

“We are left with valuation, without a catalyst, a narrative around margin expansion and limited upside in the near term,” Sinkevicius said.

Morgan Stanley derived price targets for both Tenneco and Adient from sum-of-the-parts analyses.