Tenneco Retains Buy Rating At Deutsche Bank

Analysts at Deutsche Bank maintained Buy rating on the shares of Tenneco Automotive Inc. (NYSE: TEN) with a price target of $44, as they believe that the latter's fiscal 2011 third quarter operating results were weaker than expected.

In its FY2011 Q3, Tenneco reported a significant increase in net income to $30 million, or $0.49 per diluted share, versus $10 million, or $0.17 per diluted share, in third quarter 2010. On an adjusted basis, net income also increased to $42 million, or $0.67 per diluted share, versus $24 million, or $0.39 per diluted share, a year ago. Its EPS was in-line with DB analysts estimate of $0.67 and better than Wall Street consensus of $0.66. DB analysts state that the Q3 results would have been weaker than expected excluding a $0.11 per share benefit for lower stock related competition. The company's revenue of $1.77 billion was slightly below DB analysts' estimate of $1.7 billion despite higher substrate revenue. They state that most of the downside was driven by lower incremental margins. The Q3 incremental operating margin was 11.9 percent was lower than analysts' estimate of 15.5 percent. DB analysts state that they had been expecting incremental margins in the 15 percent-16 percent range FY2010 second half, due to improved European and Asian results. The European and Asian EBIT margins did in fact improve sequentially, with each region posting double digit year-on-year incremental margins. Unfortunately, North American margins weakened due to manufacturing inefficiencies and higher material costs. The company estimates that these costs were a $10 million or $0.10 of EPS, headwind in Q3. Management expects these headwinds to moderate in Q4, but they are nonetheless likely to be drag on results for a few quarters. DB analysts' believe that investors now largely appreciate Tenneco's revenue growth opportunity; the company's ability to convert this revenue growth to the bottom line remains the key impediment to achieving higher valuation but unfortun! ately, i t appears that investors will have to continue to wait for evidence of the company's ability to achieve mid-teens incremental margins. DB analysts reduce TEN's FY2011 and FY2012 EPS estimates to $2.63 and $3.80, from $2.82 and $3.90, respectively. They reduce EBITDA to $610 million and $712 million for FY2011 and FY2012 to $633 million and $730 million, respectively.

On a year-to-date basis, Tenneco's share performance was -17.88 percent, and as compared to Standard & Poor's, it has an YTD share performance of -16.60 percent.

Tenneco engages in the design, manufacture, and sale of emission control and ride control products and systems for commercial and specialty vehicle applications. It has a market capitalization of $2.04 billion with a P/E ratio of 16.020. It has more than 60 million outstanding shares.

Shares of Tenneco were up 1.68 percent or $0.56 to trade at $33.85.

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