Shares of Tenneco (NYSE: TEN) have fallen a painful 60% through the first six months of 2019 according to data provided by S&P Global Market Intelligence. The stock actually started the year off with a large rally, gaining around 30% by March. But then things got ugly. There were two main downdrafts: one following its release of full-year 2018 earnings, and another following the release of first-quarter 2019 earnings. As you might have guessed, the news was not good.
Tenneco completed its acquisition of Federal Mogul in late 2018. The goal was to gain scale in key markets and better position itself for the future. However, the move required a material increase in the company's leverage. Financial debt to equity skyrocketed from around 0.8 times before the deal to over 2.8 times as of the first quarter of 2019. Trailing-12-month interest coverage, meanwhile, declined to less than one time -- that's a troubling sign.
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Tenneco has plans for a spinoff that should help alleviate some of the weight on its balance sheet. The actual break up, though, won't take place until mid-2020 at this point. In the meantime, auto sales have been weak in key markets like the United States and China. For original equipment auto supplier Tenneco, the big factor is that the number of cars being sold has fallen, which ends up meaning less demand for its products.
That is the backdrop for the company's full-year 2018 results, which missed analyst expectations by a whopping $0.11 a share. Worse, during the earnings conference call, it announced it had found some accounting irregularities. Although it stated they were minor, Wall Street doesn't like to hear news like that following a big merger. And, to top it all off, management provided 2019 guidance that was less than impressive.
Then, when Tenneco released first-quarter results just two months later, it had to walk back its 2019 guidance. The top end of its new revenue outlook for the year was actually below the low end of its previous guidance range. In addition, management noted that its leverage would be higher than originally expected in 2019. It was at this point that the company announced it had pushed the planned spin-off date out to mid-2020 to allow it more time to get ready for the breakup. All in, there wasn't much good news here, and the shares headed lower again.
Tenneco took on a big acquisition at what proved to be a bad time, with auto sales starting to crumble shortly thereafter. That wasn't exactly a new concern, with fears of peaking auto sales starting to show up in the second half of 2018. To some extent, fortifying its operations and then breaking up into two different, more specialized companies could be a solid strategic decision for dealing with the longer-term trends in the auto space. However, right now, the company's financial results are not living up to Wall Street expectations, and it is dealing with a very heavy debt load. Tenneco is really a special-situations stock at this point, and it's probably only appropriate for aggressive investors.
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