Shao-Lun Lu
Ying Jiang
Hui Li
Agenda
Company Overview
 Relevant Macroeconomic Trends
 Industry Structure Analysis
 Financial Analysis
 Projections/Assumptions
 Valuation
 Recommendation

Company Overview

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Info:
Incorporated in Delaware in 1929
About 25,000 employees
Market Cap : 3.66 billion
Business:
Producing Ride performance & Clean
air products systems to original
equipment and aftermarket customers
operate 62 clean air and 27 ride
performance manufacturing facilities
worldwide
Segment
Clean Air – 68%
Ride Performance – 32%
Clients
Original Equipment Manufacturer –
84%
Aftermarket – 16%
Revenue Trend - Product Lines
8 000
Total Ride
Performance
Division
7 000
6 000
5 000
4 000
3 000
Total Clean Air
Division
2 000
1 000
2009
2010
2011
2012
2013
Source: TEN 10-K report & FOURTH QUARTER AND FULL YEAR 2013 report
Revenue Analysis
Revenues by region in
2013
Aftermark
et Ride
Control
12%
Rvenue by segment
Aftermarket
Emission
Control
4%
Asia Pacific
14%
North
America
49%
Europe,
South
America &
India
37%
Original
Equipment
Ride Control
20%
Original
Equipment
Emission
Control
64%
Revenue by end market
Commercial
Truck & offhigh way
12%
Revenue by customers 2013
General Motors
15%
Aftermarket
16%
Light
Vehicle
72%
Navistar Intl
2%
Ford
Motor
14%
Volkswagen AG
8%
Daimler AG
6%
FAW
CAR CO
LTD-A
2%
Source: TEN 10-K report & Bloomberg
Other OEMs
and
aftermarket
41%
FIAT SPA
3%
Caterpillar INC
3%
Toyota Motor
4%
Saic
Motor
3%
Tenneco’s Brand
Source: TEN Website
Product Map
Source :Tenneco fourth quarter and full year 2013 report
Technology & Regulation map
Technology Roadmap
Source :Tenneco official website & TransportPolicy.net
SWOT Analysis
Strengths
 Strong market position & top leader
 Advanced R&D ability
 Strong global presence
Opportunities
 More stringent regulation of vehicle
emissions is occurring globally
 Available content per vehicle to
continue to rise over the next several
years
 Growing commercial vehicle business
Weaknesses
 Highly leverage
 Highly dependence on top 2 clients
Threats
 Vulnerable to economy cycle
 Longer product lives of automotive
parts
 Future prevalence of electric vehicle,
ex:Tesla
Relevant Macroeconomic Trends
Global automotive manufacturing industry volume forecast: thousand units, 2012–17


In 2017, the global automotive
manufacturing industry is forecast to
have a volume of 188,398 thousand
units, an increase of 37.2% since
2012.
The compound annual growth rate of
the industry in the period 2012-17 is
predicted to be 6.5%
North America automotive manufacturing industry value forecast: $ billion, 2012–17


Source: MARKETLINE
In 2017, the North American
automotive manufacturing industry is
forecast to have a volume of 21,666.2
thousand units, an increase of 32.1%
since 2012.
The compound annual growth rate of
the industry in the period 2012-17 is
predicted to be 5.7%.
Automotive Manufacturing Industry Volume
Forecast: thousand units, 2012–2017
Asia-Pacific
Europe
Source: MARKETLINE
India
South America
Light Vehicle industry production
YoY% Change
Porter’s Five forces
Rivalry
Competition
MED-HIGH
Supplier’s
bargaining
power
MED-HIGH
Buyer’s
bargaining
power
MED -High
Substitutes
LOW
• Numerous players in the industry, including small auto part players and even OEM clients
• Overall highly competitive nature of the automobile and commercial vehicle parts
industries
• Too much dependency on substrate and steel provider
• Suppliers to this industry tend to be large multinational incumbents, giving them power
over market players
• Large market players have more buying power
• Pricing pressure from OEMs.
• Emission control and ride control are necessary
• End user could replace their car with a new one instead of buying replacement parts
• Manufacturers will likely be using such products already and industry players already
offer these products
• Components are usually produced in high volumes, meaning that large capital
investment is required from new entrants
Threat of new • Significant intellectual property is needed, ex: patents and copyrights
entrants
LOW
Stock Performance
Source: Yahoo Finance
Financial Analysis
Profitability
ROA
ROE
Gross Margin
EBITDA Margin
Net Margin
2011
5.5%
N/A
16.2%
8.1%
2.5%
2012
8.4%
123.6%
16.2%
8.6%
4.1%
2013
5.8%
51.3%
15.4%
7.9%
2.8%
DORM
17.4%
22.0%
39.3%
20.8%
12.3%
BWA
9.4%
18.8%
20.9%
15.5%
8.4%
EO
1.1%
6.4%
7.7%
5.9%
0.5%
Asset Utilization
Asset Turnover
Inventory Turnover
Receivable Turnover
Payables Turnover
2011
2.2x
12.2x
7.7x
5.2x
2012
2.0x
11.0x
7.6x
5.3x
2013
2.1x
12.1x
7.7x
4.9x
DORM
1.4x
2.6x
4.1x
8.2x
BWA
1.1x
13.0x
6.2x
7.0x
EO
2.2x
15.0x
10.7x
5.7x
Liquidity
Current Ratio
Quick Ratio
2011
1.3x
0.9x
2012
1.3x
0.9x
2013
1.2x
0.9x
DORM
4.7x
2.6x
BWA
1.7x
1.4x
EO
0.8x
0.5x
Solvency
D/E
D/A
Interest Coverage
2011
N/A
36.7%
3.5x
2012
479.7%
32.7%
4.1x
2013
254.5%
28.8%
5.3x
DORM
0.0%
0.0%
N/A
BWA
33.7%
17.7%
25.0x
EO
135.8%
26.8%
2.7x
DuPont Analysis
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
2011
67.5%
71.5%
5.3%
2.2x
N/A
N/A
2012
94.1%
75.5%
5.8%
2.0x
14.7
124%
2013
64.5%
81.1%
5.3%
2.1x
8.8
51%
DORM
64.1%
99.9%
19.3%
1.4x
1.3
22%
BWA
71.8%
101.7%
11.5%
1.1x
2.0
19%
EO
41.5%
39.2%
3.0%
2.2x
6.0
6%
Greenblatt Ratio
EBIT/Tangible Assets
EBIT/EV
2011
29.7%
13.6%
2012
29.3%
13.8%
2013
29.9%
9.9%
DORM
37.1%
6.6%
BWA
36.0%
6.5%
EO
43.0%
11.2%
Source: Tenneco Inc. 2013 10-K, Tenneco Inc. 2010 10-K, Bloomberg
Comparable Companies
Source: Capital IQ, Bloomberg
Comparable Companies
Source: Capital IQ, Bloomberg
Technical Analysis
Source: StockCharts.com
Forecast Assumptions
Clean Air Division
Aftermarket
% Growth
Original Equipment
OE Substrate
% Growth
OE Value-add
% Growth
Total Clean Air Division
% of Total Revenue
% Growth
Ride Performance Division
Aftermarket
% Growth
Original Equipment
% Growth
Total Ride Performance Division
% of Total Revenue
% Growth
Total Tenneco Inc.
% Growth
2009
2010
2011
2012
2013
Average
2014E
2015E
2016E
2017E
2018E
315
-12.0%
318
1.0%
351
10.4%
318
-9.4%
327
2.8%
326
1.2%
338
3.5%
343
1.2%
324
-5.3%
344
6.0%
351
2.2%
966
-35.3%
1,638
-23.0%
2,919
63%
-26.6%
1,284
32.9%
2,223
35.7%
3,825
64%
31.0%
1,678
30.7%
2,732
22.9%
4,761
66%
24.5%
1,660
-1.1%
2,948
7.9%
4,926
67%
3.5%
1,835
10.5%
3,282
11.3%
5,444
68%
10.5%
1,485
7.6%
2,565
11.0%
4,375
66%
8.6%
2,169
18.2%
3,814
16.2%
6,321
69%
16.1%
2,371
9.3%
4,153
8.9%
6,866
68%
8.6%
2,167
-8.6%
3,862
-7.0%
6,354
68%
-7.5%
2,247
3.7%
4,585
18.7%
7,175
69%
12.9%
2,485
10.6%
5,098
11.2%
7,935
70%
10.6%
721
-5.3%
1,009
-14.3%
1,730
37%
-10.7%
4,649
-21.4%
851
18.0%
1,261
25.0%
2,112
36%
22.1%
5,937
27.7%
944
10.9%
1,500
19.0%
2,444
34%
15.7%
7,205
21.4%
944
0.0%
1,493
-0.5%
2,437
33%
-0.3%
7,363
2.2%
953
1.0%
1,567
5.0%
2,520
32%
3.4%
7,964
8.2%
947
4.0%
1,366
6.8%
2,249
34%
6.0%
6,624
7.6%
1,020
7.0%
1,802
15.0%
2,822
31%
12.0%
9,143
14.8%
1,048
2.8%
2,162
20.0%
3,211
32%
13.8%
10,077
10.2%
1,013
-3.4%
2,009
-7.1%
3,022
32%
-5.9%
9,375
-7.0%
1,013
0.0%
2,190
9.0%
3,202
31%
6.0%
10,378
10.7%
1,048
3.5%
2,332
6.5%
3,380
30%
5.6%
11,315
9.0%
Source: Tenneco Inc. 2013 10-K, Tenneco Inc. 2010 10-K
Forecast Assumptions
Revenues
Cost of Sales
Gross Margin
% of Sales
Goodwill Impairment Charge
Engineering, Research and Development Expenses
Selling, General and Administrative Expenses
Depreciation and Amortization of Intangibles
Operating Income
% of Sales
Loss on Sale of Receivables
Other Income (expense)
EBIT
% of Sales
Interest Expense
EBT
% of Sales
Income Tax Expense
Net Income (loss)
% of Sales
Less: Net Income Attributable to Noncontrolling Interests
Net Income (loss) Attributable to Tenneco Inc.
% of Sales
Source: Tenneco Inc. 2013 10-K, Tenneco Inc. 2010 10-K
2011
2012
2013
$7,205
6,037
1,168
16.2%
11
133
428
207
389
5.4%
(5)
(5)
379
5.3%
108
271
3.8%
88
183
2.5%
26
157
2.2%
$7,363
6,170
1,193
16.2%
126
427
205
435
5.9%
(4)
(3)
428
5.8%
105
323
4.4%
19
304
4.1%
29
275
3.7%
$7,964
6,734
1,230
15.4%
144
453
205
428
5.4%
(4)
424
5.3%
80
344
4.3%
122
222
2.8%
39
183
2.3%
2014E
2015E
$9,143 $10,077
7,735
8,404
1,408
1,673
15.4%
16.6%
5
174
232
503
615
217
235
515
586
5.6%
5.8%
(8)
(8)
(9)
(10)
498
568
5.4%
5.6%
110
131
388
437
4.2%
4.3%
138
155
250
282
2.7%
2.8%
37
41
214
240
2.3%
2.4%
Forecast
2016E
2017E
2018E
$9,375 $10,378 $11,315
7,800
8,614
9,414
1,575
1,764
1,901
16.8%
17.0%
16.8%
10
197
259
249
591
633
713
240
253
256
548
609
683
5.8%
5.9%
6.0%
(8)
(9)
(9)
(23)
(21)
(11)
516
579
662
5.5%
5.6%
5.9%
131
145
147
385
434
515
4.1%
4.2%
4.6%
137
154
183
248
280
332
2.6%
2.7%
2.9%
39
43
47
210
237
286
2.2%
2.3%
2.5%
Cost of Capital
Weighted Average Cost of Capital
Share Price
Shares Outstanding (millions)
Market Value of Equity (millions)
Market Value of Debt (millions)
$ 59.72
60
3,612
1,102
Percent Equity Weight
Percent Debt Weight
77%
23%
Cost of Debt
Cost of Equity
CAPM
Realized Return
Cost of Equity
2.6%
15.17%
12.00%
14.22%
Tax Rate
35.5%
WACC
11.3%
Discount Rate
CAPM
Risk-Free Rate
Market Risk Premium
5-Year Beta
3-Year Beta
CAPM Cost of Equity
11.3%
Source: Tenneco Inc. 2013 10-K, Bloomberg
2.75%
6.00%
2.95
2.07
15.17%
ROE
2011
2012
2013
70%
30%
Cost of Equity
Weightings
N/A
111.79%
42.26%
Annual Realized Returns
Year
1
2
3
Total Realized Return
Arithmetic Annual Return
Geometric Annual Return
Actual
-12%
6%
48%
40.50%
13.68%
12.00%
Valuation-DCF
Tenneco Inc. Discounted Cash Flow Analysis ($ millions)
EBIT
EBIT*(1-t)
Depreciation
Stock-based compensation
Capital Expenditures
Changes in Net Working Capital
Less Increases in Receivables
Less Increases in Inventories
Less Increases in Deferred Income Taxes
Less Increases in Prepayments and Other
Plus Increases in Trade Payables
Plus Increases in Accrued Taxes
Plus Increases in Accrued interest
Plus Increases in Accrued liabilities
Plus Increases in Other Current Liabilities
Total Changes in NWC
Free Cash Flow to Firm
PV of FCFF
% of EV
Discount Rate
Calculation of Implied Share Price
Implied Enterprise Value
Less Debt
Implied Market Cap
Terminal
Value
2014E
2015E
2016E
2017E
2018E
498
321
217
15
(269)
568
366
235
15
(269)
516
333
240
20
(269)
579
374
253
20
(269)
662
427
256
20
(269)
146
117
2
33
188
24
(1)
22
(3)
(67)
217
195
4%
143
67
7
26
40
7
1
28
9
(159)
188
152
3%
(94)
(60)
(6)
(20)
(116)
(5)
(1)
(21)
(7)
29
353
256
6%
124
81
8
28
289
7
(4)
30
10
90
468
305
7%
102
80
7
26
203
7
0
28
9
32
466
273
6%
5,796
3,395
74%
Terminal Value
Terminal Growth Rate
Marginal Tax Rate
3.0%
36%
11.3%
4,577
1,102
3,475
Implied Share Price
$ 57.46
Source: Tenneco Inc. 2013 10-K, Tenneco Inc. 2010 10-K
Discount Rate
Discount Rate
Valuation-DCF
########
9.8%
10.8%
11.8%
12.8%
13.8%
$ 57.46
9.3%
10.3%
11.3%
12.3%
13.3%
$
$
$
$
$
Implied Enterprise Value
Terminal Growth Rate
2.0%
2.5%
3.0%
3.5%
5,081 $ 5,366 $ 5,693 $ 6,072
4,455 $ 4,669 $ 4,911 $ 5,185
3,959 $ 4,124 $ 4,308 $ 4,514
3,556 $ 3,686 $ 3,830 $ 3,990
3,222 $ 3,327 $ 3,442 $ 3,568
$
$
$
$
$
Implied Share Price
Terminal Growth Rate
2.0%
2.5%
3.0%
3.5%
71.74 $ 77.21 $ 83.54 $ 90.97
60.07 $ 64.10 $ 68.70 $ 73.96
50.93 $ 54.01 $ 57.46 $ 61.35
43.59 $ 45.99 $ 48.66 $ 51.63
37.56 $ 39.48 $ 41.59 $ 43.92
$
$
$
$
$
4.0%
6,517
5,501
4,747
4,167
3,707
$
$
$
$
$
4.0%
99.80
80.07
65.78
54.96
46.49
Implied Share Price
Weights Implied Share Price
Comps
30%
$76.44
DCF
70%
$57.46
Implied Share Price
$63.15
Current Stock Price: $59.72
Recommendation
Watch List
24