Fitch Ratings has upgraded the credit ratings of Tenneco Inc. (TEN) based on the improvement in the automotive sector. The rating agency raised the company’s issuer default rating by one notch to “BB”, secured credit facility rating to “BBB-” from “BB+” and its senior unsecured rating to “BB-” from “B+”. It has also maintained a stable outlook on the company.
Fitch believes Tenneco will benefit from tighter emissions standards globally for light and commercial vehicles and off-road equipment. The company is launching diesel after treatment programs with 13 commercial vehicle and engine manufacturers globally through 2012 in North America, Europe, China and South America.
It is also adding Daimler (DDAIF) and MAN, both in South America, to its list of nine previously announced commercial vehicle customers. In addition, it has recently announced new aftermarket business in North America with seven customers, which is expected to generate more than $15 million in annual revenue.
Fitch also appreciated Tenneco’s improved margins and debt position. The company depicted a profit of $39 million or 63 cents in the first quarter of 2011, surpassing the Zacks Consensus Estimate by 15 cents per share. It more than doubled from $15 million or 25 cents in the same quarter of 2010 driven by higher original equipment (OE) volumes and strong aftermarket sales.
Adjusted EBIT margin was 5.4%, up from 4.9% a year ago. The improvement was attributable to stronger OE and aftermarket volumes, new light and commercial vehicle launches and leveraging SGA&E (selling, general, administrative and engineering) expenditure. These factors more than offset the negative impact of a mix shift between OE and aftermarket revenue and a 62% rise in substrate sales.
As of March 31, 2011, Tenneco’s leverage ratio – net debt to adjusted EBITDA including non-controlling interests – reduced to 2.1X from 2.8X as of March 31, 2010.
Recently, Tenneco’s board of directors has approved a share repurchase program by authorizing the repurchase of up to 400,000 shares of the company’s outstanding common stock for the next 12 months. The program is intended to offset dilution from shares of restricted stock and stock options that were issued in 2011 to employees under the company’s long-term compensation plan.
Despite the positive factors, the impact of the earthquake and tsunami in Japan and weaker industry conditions, especially in Australia are expected to hamper the company’s results. As a result, the company retains a Zacks #3 Rank on its stock, which translates into a short-term (1 to 3 months) rating of ‘Hold’ and we reiterate our long-term (more than 6 months) recommendation of “Neutral”.
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