Tenneco’s stock (NYSE: TEN) lost about 90% of its value in the last three years, with the stock price dropping from $60 at the end of 2016 to just over $5 now. What’s surprising is that during the same period, Tenneco’s revenues more than doubled.
But how was this slide in stock price possible with Tenneco’s revenues seeing a huge jump of 102% between 2016 to 2019? There definitely was a reason – it’s earnings fell at a faster rate than the rate at which revenues grew. Turns out Tenneco’s earnings margins (profits as a % of revenue) steadily dropped over the last few years from 4.8% in 2016 to 0.9% in 2018. This was followed by the company reporting losses in 2019 when margins crashed to -1.3%. The Net Income margin fell over the years due to higher operating costs (as % of revenues) and additional restructuring and goodwill impairment costs due to the acquisitions of Federal-Mogul in 2018 and Öhlins Intressenter in 2019. In the last 3 years, Tenneco recorded total restructuring and goodwill impairment costs of $0.55 billion.
Our interactive dashboard Why Is There A Mismatch In The Rate At Which Tenneco’s Revenues And Stock Price Have Changed? gives a detailed picture of how stock and revenue moved for the company over recent years.
Combination of these factors: revenues going by 102% but margins crashing to negative meant earnings per share declined sharply from $6.20 in 2016 to -$4.12 in 2019. Further, the market seems to have lowered its near-term outlook for Tennco due to the ongoing crisis – something that reflects clearly in the fact that the stock almost fell to $2 in late March. The global spread of coronavirus has led to a slowdown in industrial and economic activity, thus affecting consumer spending power, which could affect demand for Tenneco’s products to a great extent. However, if there are signs of the current crisis abating anytime by the end of Q2 2020, we believe there is a significant upside for the company with an opportunity for a rise in EPS and P/E multiple.
Incidentally, there is also a mismatch in the rate of growth of revenue and stock price for auto manufacturer Ford – one of Tenneco’s largest customers.
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