Credit Suisse On Tenneco: "Commercial Vehicles Opportunity Limited Over the Near-Term; Long Term Targets Seem Challenging"

In a report published Thursday morning, analysts at Credit Suisse initiated coverage on Tenneco Automotive, Inc. TEN with a Neutral rating and a $60 price target, on the back of limited near-term opportunity for its commercial vehicles (CV) segment and challenging long-term targets. The stock currently trades around $51.56, so the potential upside implied surpasses 16 percent.

According to Credit Suisse’s report, there are several risks around the guidance provided by the company -- 10% original equipment revenue growth over the next five years, implying a ~20% increase in CV/Off-Highway. Namely:

“ - Slow Growth in Global CV: 2015 MD/HD truck output is expected to be relatively flat in the major regions, with ag and mining equipment demand materially lower (ie >10%).

- China NOT A Big Near-Term Contributor: Slow phase-in of emissions regs suggests that China will not be a major contributor to TEN’s CV OE growth in the near-term; we est Tenneco could generate ~$200 mln in incremental value-add revs over the next 5 yrs, or only 20% of its total CV/Off-Highway rev base.

- Strong Content Growth Needed in NA/Europe On-Road: To hit its target, we believe TEN would need to more than double its On-Road CPV in developed regions over the next 5 yrs; this could be tough considering there are no new emissions regs upcoming in the US and Euro-6 standards in the EU have largely been phased-in.”

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On the flip side, Credit Suisse analysts Daniel Galves, Shreyas Patil and Tanu Chauhan see Tenneco in a strong position to start returning cash to shareholders in 2015. They think the company could have about $300 million of deployable cash this year, “though mgmt has yet to provide a concrete timeline on when or how it plans to use this.”