“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
TENNECO INC. $46(New York symbol TEN; Manufacturing & Industry sector; Shares outstanding: 51.4 million; Market cap: $2.4 billion; Dividend yield: 2.2%; Takeover Target Rating: Medium; www.tenneco.com) is a leading maker of auto parts. Those products include emission and exhaust systems as well as shocks and struts.
The company currently has 92 manufacturing plants in over 25 countries. It makes about 80% of its revenue as a parts supplier to big automakers such as General Motors and Ford. The remaining 20% of revenue comes from aftermarket sales to mechanics and consumers.
Tenneco’s main business is its Clean Air business (70% of 2017 revenue). It makes catalytic converters, particulate filters, manifolds, valves, mufflers and related products. The company’s Ride Performance business (20% of revenue) makes shock absorbers, struts and vibration control systems.
Overall revenue rose 5.8%, from $7.9 billion in 2013 to $8.4 billion in 2014. Revenue then fell 2.4% to $8.2 billion in 2015, before recovering to $8.6 billion in 2016. It then rose again, in 2017, to $9.3 billion.
Earnings jumped 95.6%, from $182 million in 2013 to $356 million in 2016. Due to fewer shares outstanding, per-share earnings rose at a faster rate of 113.2%, from $2.96 to $6.31.
In 2017, Tenneco’s earnings fell to $207 million, or $3.91 a share. That’s mainly due to costs related to a restructuring plan and an adjustment related to the new U.S. tax code. Without those and other unusual items, the company earned $365 million, or $6.89 a share.
In the three months ended March 31, 2018, Tenneco’s revenue rose 12.3%, to $2.6 billion from $2.3 billion a year earlier. Excluding one-time items, earnings increased 2.5%, to $81 million from $79 million. Per-share earnings rose 8.2%, to $1.58 from $1.46, on fewer shares outstanding.
In April 2018, the company agreed to buy Federal Mogul—Carl Icahn’s auto parts business—for $5.4 billion. That purchase price includes $800 million in cash, $3 billion of the firm’s debt, and $1.6 billion in Tenneco shares.
Icahn bought a majority stake in Federal Mogul in 2008 and took full ownership of the company in 2017. When Tenneco completes its acquisition of the firm this year, Icahn will remain its largest shareholder with 36% of the stock.
Tenneco plans to split itself into two publicly traded firms once it completes the Federal Mogul deal. One of the two new businesses will focus on ride-performance and replacement parts. It should have annual revenue of $6.4 billion. About 51% of its revenue will come from North America, followed by Europe (37%) and Asia (12%). The business should also have gross earnings of $595 million.
The second new firm will make powertrain and exhaust parts. It will have annual revenue of $10.7 billion (North America, 41%; Europe, 39%; and Asia, 20%); it should achieve annual gross earnings of $1.03 billion.
Tenneco has yet to announce details of the spinoff, but aims to complete the transaction in mid-2019.
Meantime, the stock trades at an attractive 6.1 times the $7.50 a share that Tenneco should earn in 2018. The $1.00 dividend yields 2.2%.
Tenneco is a spinoff buy.
Formed in 1999 when the old Tenneco Inc. split into two firms: automotive parts and packaging.
In 2005, Tenneco Automotive changed its name to Tenneco (the current company).
Top brands include Monroe (shocks and struts) and Walker (mufflers).
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