Tenneco Hitting the BRICs
Tenneco, Inc. (TEN) is witnessing revenue improvements and has been successful in its cost reduction efforts and restructuring activities. The company holds a leading position in nearly every product category it offers. Moreover, diversification has proved to be a major positive for the company.
The company is also noting incremental new business orders in European light-vehicle sales, which will support top-line growth in the long run due to tightening environmental regulations. Recently, the company won new business with Japanese OEMs [original equipment manufacturers] worth approximately $200 million in annualized revenues.
The new business includes contracts with five Japanese OEMs for vehicles to be launched between 2008 and 2010. Approximately 20% of the new business is in the growing BRIC countries [Brazil, Russia, India, and China]. Raw material prices for steel have been high due to strong demand from China, coupled with little new steel capacity. Since this is a major raw material for the company, any rise in steel prices constrains earnings.
The company is highly leveraged, with a 90% debt/capital ratio. Additionally, 50% of the company's debt carries a variable interest rate linked to LIBOR (London Inter Bank Offer Rate).
Currently, shares of Tenneco, Inc. are trading at 11.7x our 2008 EPS estimate of $2.93. Tenneco is witnessing revenue improvements and has been successful in cost reduction efforts and restructuring activities. However, elevated commodity costs, oil prices, and sizeable production cuts at General Motors (GM) and Ford (F) lead us to rate the stock a Hold. We set a six-month target price of $28. This is 9.6x our 2008 estimate.
Slowing Growth at Eastman Chemical
Eastman Chemical Company (EMN) has a strong fibers business and solid financials, plus a potential restructuring of the company's PET [polyethylene terephthalate] business. The company is likely to benefit from its recent focus on industrial gasification.
Feedstock and energy cost increases continue to be an issue, particularly for propane and ethane. This tends to increase paraxylene (PX) prices. PX is one of the largest single-product purchases for Eastman, and is the backbone of the Performance Polymer segment. This segment has the greatest earnings sensitivity to raw material pricing. Raw materials are 70% of sales, and 80% are purchased under long-term contracts.
Currently, Eastman is valued at 12.4x our 2008 earnings estimate of $5.12 per share.
