(TEN) Tenneco Incorporated Analyst Remains Neutral

We reiterate our Neutral recommendation on Tenneco Inc. (TEN), which is a leading manufacturer and supplier of emission control, ride control systems, and systems for the automotive original equipment manufacturers (OEMs) and the aftermarket.

Tenneco Inc. released its 2011 first quarter results on May 03, 2011. The company reported a profit of $39 million or 63 cents per share in the quarter, almost doubling from $15 million or 25 cents per share in the same quarter of 2010, driven by higher OE volumes and strong aftermarket sales.

Revenues in the quarter appreciated 34% to $1.76 billion on the back of higher OE production volumes, strong aftermarket sales and incremental revenues from new light and commercial vehicle launches.

Tenneco has an efficient restructuring strategy and a sound financial position. Under the present global restructuring plan (which includes flex operations at plants, plant closures and elimination of 1,100 positions worldwide), the company expects to generate $58 million in annualized cost savings. Working capital improvements, particularly in inventory, have helped the company improve cash flow.

The company also takes much effort in broadening its product portfolio, gain new business and attain a dominant position in the emerging markets through various acquisitions and alliances.

The company has strategic alliances in Japan with the exhaust manufacturer Futaba and the ride control manufacturer Hitachi Ltd. (HIT). It established a presence in Thailand through a joint venture with the Thai exhaust system manufacturer Yarnapund Co., which supplies exhaust components to General Motors Company (GM) and Japanese carmaker Isuzu.

The company also acquired the suspension business of Gruppo Marzocchi, a supplier of suspension technology in the two-wheeler market based in Italy. In China, the company has increased its footprint over the years through several joint ventures with partners including Germany-based Eberspächer International and China-based companies Chengdu Lingchuan Mechanical Plant, Shanghai Tractor and Engine Co. (a subsidiary of Shanghai Automotive Industry Corp.), Beijing Automotive Industry Company and Beijing Hainachuan Automotive Parts Company Limited.

Moreover, Tenneco’s Emission Control segment will benefit from tighter emission regulations through 2015, when its global market share is expected to hit 10%. The company expects to achieve a 5-year average compound annual OE revenue growth rate of 18% to 20% through 2014, driven by emissions regulations that are being implemented globally.

However, pricing pressure from OEMs will continue to remain a major problem for Tenneco. Sales and pricing to automotive retailers such as AutoZone Inc. (AZO) and Advanced Auto Parts Inc. (AAP) have been soft as they have been consolidating and forcing pricing concessions.

Secondly, weakening demand for aftermarket parts compared to original equipments (OE) is another headwind for the company. The aftermarket has experienced longer replacement cycles due to the improved quality of OE parts and increases in the average useful life of automotive parts.

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