On Dec 19, 2014, we issued an updated research report on Tenneco Inc. (TEN). This Zacks Rank #3 (Hold) stock had reported a positive earnings surprise of 15.7% in the last quarter.
Tenneco reported adjusted earnings per share of $1.25 in the third quarter of 2014, beating the Zacks Consensus Estimate of $1.08. Earnings per share improved 26.3% from 99 cents in the third quarter of 2013. Revenues increased 6% year on year to $2.08 billion, marginally missing the Zacks Consensus Estimate of $2.10 billion. The improvement can be attributed to higher revenues from both segments.
Tenneco expects higher light vehicle unit volumes, incremental revenue from increased content on commercial truck and off-highway equipment programs, and a strong year-over-year increase in North America aftermarket revenue, to be positive drivers in the fourth quarter. The company also projects a 3% increase in global light vehicle production in the fourth quarter and light vehicle revenues to be in line with or slightly higher than the prior-year quarter. Further, the company anticipates to record strong 2014 revenues, driven by higher light vehicle sales.
Tenneco’s emission control business 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 original equipment revenue growth rate of 18%–20% through 2014, driven by emissions regulations that are being implemented globally. This will accelerate growth in the on-road and off-road commercial vehicle markets.
However, we are concerned about the challenging situation in the Clean Air segment in South America due to lower production volumes, relatively weak economic conditions and reduced light and commercial vehicle production. In the fourth quarter of 2014, light vehicle production is expected to decline 1% in Europe and 9% in South America. In addition, pricing pressure from OEMs and dependence on a few customers in the OEM segment, remain problems for Tenneco.
Key Picks from the Sector
Investors interested in the auto industry could consider better-ranked stocks like Allison Transmission Holdings, Inc. (ALSN), Gentex Corp. (GNTX) and STRATTEC Security Corporation (STRT). All these stocks have a Zacks Rank #1 (Strong Buy).
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