Tenneco: Earnings Preview

| About: Tenneco Inc. (TEN)

Tenneco (NYSE:TEN) is scheduled to release its sales and earnings results for the fourth quarter and full year 2009 before the market opens on Thursday, Feb 4, 2010. The Lake Forest, Illinois-based manufacturer and supplier of emission control and ride control systems showed an improvement in third quarter profit to $3 million or 7 cents per share, compared to less than $1 million or a penny per share a year ago.

Earnings was better than the Zacks Consensus Estimate of 4 cents per share for the quarter. Furthermore, adjusted EBIT went up 36% to $46 million from $34 million in the prior-year quarter.

Tenneco has a diversified platform mix, which includes all top-selling light trucks in North America and a majority of top-selling passenger cars overseas. This has helped the company to win significant business.

Tenneco’s Emission Control segment expects to benefit from tightening emission regulations through 2015, expecting the global market share to hit 10% by then. Currently, the company has a number of production or development contracts with 11 on-road commercial vehicle customers, which are expected to generate new revenues starting in 2010 in the U.S., Europe, China and South America.

Further, Tenneco has an efficient restructuring strategy. Under the present global restructuring plan, which includes flex operations at plants, plant closures and elimination of 1,100 positions (500 salaried and 600 hourly) worldwide, the company expects to generate $58 million in annualized cost savings.

However, pricing pressure from original equipment manufacturers (OEMs) remains a problem for Tenneco. Demands for concessions from OEMs are constricting the company’s margins. Additionally, the company largely depends on a few customers in the OEM segment, with General Motors, Ford and Volkswagen accounting for about 40% of sales.

Tenneco is also facing lower original equipment (OE) production volumes in Europe, North America and Australia as well as declining European aftermarket sales, where margins are twice as high as in direct sales to automakers.

The company is relying on robust light vehicle production growth in China and India. However, we believe sizable production cuts in the OE market will continue to mar the company’s results. For 2009, the Zacks Consensus Estimate reflects a loss of 76 cents per share. Thus, we stick to our Neutral recommendation for the stock.