Automotive production is being regulated by governments worldwide to meet stricter environmental and safety standards. This trend strongly benefits auto parts manufacturers that produce emission-control products and safety products such as Tenneco Inc (TEN).
Tenneco is projected to improve its financial position over the coming years, through a series of profitable items such as: emission-control products, that enhance engine performance and meet strict environmental regulations, as well as ride-control products that improve safety by bettering braking, steering, and the whole driving experience. Thus, TEN is expected to have a revenue growth around 10% over a five –year period.
Making Benefits Out of Stricter Regulations
Management projected a 7% to 11% hike in total revenue for 2014. In addition, revenue derived from off-road vehicles and commercial trucks is bound to increase by 20%-30%, as automotive manufacturers need to meet Tier 4 (USA) and Stage 4 (Europe) off-road regulations.
As mentioned above, emission regulations will boost growth in both commercial and off road vehicle markets. Hence, the company´s emission control operating group is expected to benefit from this situation. Tenneco should obtain a revenue growth rate of about 18% throughout 2014 from original equipment (OE) production for its OEMs customers.
The Good Competitive Position of This Bull
The streets surely recognized this company´s potential, which is fostered by its strong competitive position in comparison to its peers. Tenneco has a global footprint that allows the company to be present in North America, Europe, South America, and Asia. This enables the firm to penetrate several markets simultaneously with its new technologies, while carving out a competitve advantage over industry peers.
Furthermore, Tenneco has developed a narrow economic moat which stems from its geographically diversified presence, long-term customer ties, and high switching costs for its customers. In addition, the company benefits from producing both safety and emission-control products that allows TEN to compete in two profitable markets. Competing against industry giants such as Autoliv Inc. (ALV) or BorgWarner Inc. (BWA) is thus facilitated.
Finally, OEMs prioritize suppliers like Tenneco, which are able to meet their global requirements. Moreover, Tenneco´s manufacturing footprint is clearly a barrier to entry for other competitors, along with its close customer ties with OEMs that are essential for succeeding in the auto parts industry.
A Profitable Future Ahead
Tenneco will strongly benefit from two global trends. First, the improvement in macroeconomic global conditions will boost commercial vehicle production volume. Second, and as a result of the first trend, the company will benefit from stricter environmental and safety regulations for commercial vehicles, since it will increase the content of emission and safety products therein. This indicates why the company projects OE revenue to be around $7.5 billion.
I feel very optimistic regarding this company’s future, especially considering its astonishing EPS rate of 67.70%. In addition, its revenue growth rate is now at 9.90%, which is very close to the projections that were made for Tenneco Inc at the beginning of the year. Moreover, the company’s growing tendency in terms of revenue and net income, along with the yearly reduction of its debt, has led to a great improvement in Tenneco’s operating margin. Finally, hedge fund gurus like Joel Grennblatt have also seen a great investment opportunity in this company, and have invested in this auto parts bull.
Disclosure: Victor Selva holds no position in any stocks mentioned.