TEN - Tenneco

[Mephistopheles]

This is the company that Charlie Munger bought some years ago after reading about in Barron's. He paid between $1-2 /share and sold it at $15 before it moved up to $40. Recently the stock fell to low single digits, someone mentioned it in another thread so I decided to take some time to look at it.

 

Tenneco makes automotive parts, both for OEM and the aftermarket. 80% of its revenue and 75% of its EBITDA is from OEM, the balance from aftermarket. It manufactures and markets some of the leading brands in the auto part business with #1 or 2 market share positions for most of its products. The OE business consists of predominantly the "Clean Air" business which is in the process of secular tailwind thanks to increasing emission control demands worldwide. The aftermarket business also has tailwinds as a result of increasing age of vehicles on the road, requiring increased maintenance.

 

Near the end of 2018 they made a sizeable acquisition which significantly increased their debt load. The company has about $5 billion of net debt, and another $550 million or so of underfunded pensions. Meanwhile, the equity market cap is only about $350 million. Prior to the pandemic, management was forecasting adjusted FCF of $100-200 million for 2020. Obviously that won't be happening.

 

Looking at the 10-k, I see $1.1 billion in contractual obligations over 2020. As of 3/31/2020 there is $700 million cash on hand and another $800 million on untapped credit line. The net debt/ebitda ratio on 12/31/2020 was 3.5; the max allowed was upped from 3.75x to 4.5x this past February.

 

To compare - YE 2008 company's leverage ratio was 3.7 and went up to 5.8 six months later. The company was FCF positive from 2008-2010.

 

I think the company has enough liquidity to make it through the recession. Assuming that happens, the stock is a steal right now.

[valueinvestor]

This is the company that Charlie Munger bought some years ago after reading about in Barron's. He paid between $1-2 /share and sold it at $15 before it moved up to $40. Recently the stock fell to low single digits, someone mentioned it in another thread so I decided to take some time to look at it.

 

Tenneco makes automotive parts, both for OEM and the aftermarket. 80% of its revenue and 75% of its EBITDA is from OEM, the balance from aftermarket. It manufactures and markets some of the leading brands in the auto part business with #1 or 2 market share positions for most of its products. The OE business consists of predominantly the "Clean Air" business which is in the process of secular tailwind thanks to increasing emission control demands worldwide. The aftermarket business also has tailwinds as a result of increasing age of vehicles on the road, requiring increased maintenance.

 

Near the end of 2018 they made a sizeable acquisition which significantly increased their debt load. The company has about $5 billion of net debt, and another $550 million or so of underfunded pensions. Meanwhile, the equity market cap is only about $350 million. Prior to the pandemic, management was forecasting adjusted FCF of $100-200 million for 2020. Obviously that won't be happening.

 

Looking at the 10-k, I see $1.1 billion in contractual obligations over 2020. As of 3/31/2020 there is $700 million cash on hand and another $800 million on untapped credit line. The net debt/ebitda ratio on 12/31/2020 was 3.5; the max allowed was upped from 3.75x to 4.5x this past February.

 

To compare - YE 2008 company's leverage ratio was 3.7 and went up to 5.8 six months later. The company was FCF positive from 2008-2010.

 

I think the company has enough liquidity to make it through the recession. Assuming that happens, the stock is a steal right now.

 

https://www.valueinvestorsclub.com/idea/TENNECO_INC/1706855465#description

 

FYI

[jeffsreng]

FYI:

 

https://www.brokenleginvesting.com/charlie-munger-cigar-butt/

[Mephistopheles]

 

https://www.valueinvestorsclub.com/idea/TENNECO_INC/1706855465#description

 

FYI

 

I don't like it when people post links without offering any of their own comments, what's the point? I see it as a bit patronizing.

 

I read this VIC report before I made my post. I found it a bit hyperbolic and anecdotal. I didn't find any evidence of the liabilities associated with the piston business, for instance. There was a settlement with the hexavalent chromium stuff some years ago, and I don't see it as an issue going forward. But maybe I'm wrong, do you have any insights to provide?

[K2SO]

 

I don't like it when people post links without offering any of their own comments, what's the point? I see it as a bit patronizing.

 

 

Because one doesn't know what you've already read, and you might appreciate the information and perspective?  If you've already read it, you can skip over it instead of feeling insulted.

 

I for one appreciate the links to relevant information sources.

 

 

[valueinvestor]

 

https://www.valueinvestorsclub.com/idea/TENNECO_INC/1706855465#description

 

FYI

 

I don't like it when people post links without offering any of their own comments, what's the point? I see it as a bit patronizing.

 

I read this VIC report before I made my post. I found it a bit hyperbolic and anecdotal. I didn't find any evidence of the liabilities associated with the piston business, for instance. There was a settlement with the hexavalent chromium stuff some years ago, and I don't see it as an issue going forward. But maybe I'm wrong, do you have any insights to provide?

 

I’ll keep in mind to refrain from providing any relevant links to your post. As for insight - I don’t provide any unless I think it’s unique or not priced into the asset/market. At the moment, Tenneco is not a subject I have any competence speaking or touching on...

[Mephistopheles]

 

https://www.valueinvestorsclub.com/idea/TENNECO_INC/1706855465#description

 

FYI

 

I don't like it when people post links without offering any of their own comments, what's the point? I see it as a bit patronizing.

 

I read this VIC report before I made my post. I found it a bit hyperbolic and anecdotal. I didn't find any evidence of the liabilities associated with the piston business, for instance. There was a settlement with the hexavalent chromium stuff some years ago, and I don't see it as an issue going forward. But maybe I'm wrong, do you have any insights to provide?

 

I’ll keep in mind to refrain from providing any relevant links to your post. As for insight - I don’t provide any unless I think it’s unique or not priced into the asset/market. At the moment, Tenneco is not a subject I have any competence speaking or touching on...

 

My apologies, that came off harsh, I sounded like a jerk.

I appreciate the link and if you do have others, please continue to post.

 

I'm still learning about this industry and will share updates as well whenever I have any. I still think that VIC writeup has weaknesses, but if anyone has any other views on it I'd be happy to hear.

[valueinvestor]

 

https://www.valueinvestorsclub.com/idea/TENNECO_INC/1706855465#description

 

FYI

 

I don't like it when people post links without offering any of their own comments, what's the point? I see it as a bit patronizing.

 

I read this VIC report before I made my post. I found it a bit hyperbolic and anecdotal. I didn't find any evidence of the liabilities associated with the piston business, for instance. There was a settlement with the hexavalent chromium stuff some years ago, and I don't see it as an issue going forward. But maybe I'm wrong, do you have any insights to provide?

 

I’ll keep in mind to refrain from providing any relevant links to your post. As for insight - I don’t provide any unless I think it’s unique or not priced into the asset/market. At the moment, Tenneco is not a subject I have any competence speaking or touching on...

 

My apologies, that came off harsh, I sounded like a jerk.

I appreciate the link and if you do have others, please continue to post.

 

I'm still learning about this industry and will share updates as well whenever I have any. I still think that VIC writeup has weaknesses, but if anyone has any other views on it I'd be happy to hear.

 

Any consolation, I mostly attributed the harshness to the wording of your statement, I didn't really believe you intended it to be harsh.

 

However the apology and clarification was appreciated :)

[Mephistopheles]

Started selling some today, up about 150-200%, mainly to manage position sizing but also because risk/reward is different. I still think it's a decent company but pretty highly levered.

[valueinvestor]

Congrats!

[Mephistopheles]

Congrats!

 

Thank you! Now watch it shoot up another 50-100% in the next week.

[valueinvestor]

Just did with PK and AEO lol, but hey it’s happens to the best of us.  :P

[nspo]

This is a tough call for me. I started loading up some leaps at around 4. My thought was that the business has an out in their Driv spinoff slated for later this year. The sub does about $500m in ebitda and can likely take 3-4x leverage. This leverred spin will free up the remainco. The business has $1.5B in liquidity and next big maturity in 22'. If they can successfully spin (ie Icahn pushes the board) I think this thing can absolutely take off to levels seen in the past. It's tough because of the urge to take some off the table but I believe there's a good probability of these plans.

[Mephistopheles]

This is a tough call for me. I started loading up some leaps at around 4. My thought was that the business has an out in their Driv spinoff slated for later this year. The sub does about $500m in ebitda and can likely take 3-4x leverage. This leverred spin will free up the remainco. The business has $1.5B in liquidity and next big maturity in 22'. If they can successfully spin (ie Icahn pushes the board) I think this thing can absolutely take off to levels seen in the past. It's tough because of the urge to take some off the table but I believe there's a good probability of these plans.

 

I like the liquidity, but you're saying load up Driv with leverage prior to spinoff, would that not create potential fradulent conveyance issues in the event of a default?

 

Otherwise, stock has nearly halved in less than 3 weeks. I started selling near term puts which are priced very well. Too bad I only sold off about a quarter of my position at $12.