× In our opinion, Tenneco stock valuation has been unfairly punished because of the high level of debt after the Federal-Mogul acquisition; the postponement of the separation of DRiV, which implies previously unanticipated integration challenges; as well as transient operating environment and cost issues.
× The company has demonstrated an ability to perform in an unfavorable operating environment while carrying a high debt burden. In 2008 and 2009, total debt/EBITDA exceeded 4.0 times. In 2009, the stock hit a low of $0.70. Since then, shares have traded as high as $68.71 (2016), and total debt/EBITDA reached a low of 1.6 (2014). At the end of the second quarter of 2019, the credit metric was 3.5 times.
× Our forecast assumes 1% pro forma average annual revenue growth from 2017 (the year before the Federal-Mogul acquisition) to 2023 versus a 4% 10-year historical growth rate for old Tenneco. Our Stage I EBITDA margin assumptions average 9.7%, with a normalized sustainable midcycle of 9.6%.
× During the past 10-years, Tenneco’s high, low, and median EBITDA margins have been 9.6%, 7.3%, and 9.1%. In 2017, including targeted $200 million integration cost savings and adding $50 million for public company costs for the eventual spin-off of DRiV, we estimate pro forma EBITDA margin would have been 10.4% versus Tenneco’s as-reported 9.4%.
× We estimate that for our model to generate a fair value equivalent to the sell-side consensus estimate and the current market valuation, investors would have to believe midcycle EBITDA margins of 5.5% and 5.0%, respectively.
Tenneco Inc. designs, manufactures, and sells clean air, powertrain, and ride performance products and systems for light vehicle, commercial truck, off-highway, industrial, and aftermarket customers worldwide. The company operates through Clean Air, Powertrain, Ride Performance, and Motorparts segments. It offers clean air products and systems, including catalytic converters and diesel oxidation catalysts; diesel particulate filters(DPFs); burner systems; lean nitrogen oxide (NOx) traps; selective catalytic reduction (SCR) systems; hydrocarbon vaporizers and injectors; SCR-coated diesel particulate filters systems; urea dosing systems; four-way catalysts; alternative NOx reduction technologies; mufflers and resonators; fabricated exhaust manifolds; pipes; hydroformed assemblies; elastomeric hangers and isolators; and aftertreatment control units. The company also provides powertrain products and systems, such as pistons; piston rings; cylinder liners; valve seats and guides; bearings; spark plugs; valvetrain products; system protection products; and seals and gaskets. In addition, it offers motor parts, including steering and suspension, braking, sealing, engine, emission, and maintenance products, as well as shocks and struts; and ride performance products and systems comprising advanced suspension technologies, and ride control and braking products, as well as noise, vibration, and harshness performance materials. The company was formerly known as Tenneco Automotive Inc. and changed its name to Tenneco Inc. in 2005.
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