TENNECO INC. (TEN)

Shao-Lun LuYing JiangHui Li

Agenda Company Overview Relevant Macroeconomic Trends Industry Structure Analysis Financial Analysis Projections/Assumptions Valuation Recommendation

Company Overview Info: Incorporated in Delaware in 1929 About 25,000 employees Market Cap : 3.66 billion Business: Producing Ride performance & Clean

air products systems to original equipment and aftermarket customers

operate 62 clean air and 27 ride performance manufacturing facilities worldwide

Segment Clean Air – 68% Ride Performance – 32% Clients Original Equipment Manufacturer –

84% Aftermarket – 16%

Source: TEN 10-K report & FOURTH QUARTER AND FULL YEAR 2013 report

2009 2010 2011 2012 2013 -

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Total Clean Air Division

Total Ride Per-formance Divi-

sion

Revenue Trend - Product Lines

Revenue Analysis

North America

49%

Europe, South America & India

37%

Asia Pacific13%

Revenues by region in 2013

Light Vehicle72%

Commercial Truck & off-high

way12%

Aftermarket16%

Revenue by end market

Aftermarket Emission Control

4%

Original Equipment Emission Control

64%

Original Equipment Ride Control

20%

Aftermarket Ride Con-trol

12%

Rvenue by segment

General Motors15%

Ford Motor14%

Volkswagen AG8%

Daimler AG6%

Toyota Motor4%Saic Motor

3%Caterpillar INC

3%FIAT SPA

3%FAW CAR CO LTD-A

2%

Navistar Intl2%

Other OEMs and af-termarket

41%

Revenue by customers 2013

Source: TEN 10-K report & Bloomberg

Tenneco’s Brand

Source: TEN Website

Product Map

Source :Tenneco fourth quarter and full year 2013 report

Technology & Regulation map

Technology Roadmap

Source :Tenneco official website & TransportPolicy.net

SWOT AnalysisStrengths Weaknesses

Strong market position & top leader Advanced R&D ability Strong global presence

Highly leverage Highly dependence on top 2 clients

Opportunities Threats More stringent regulation of vehicle

emissions is occurring globally Available content per vehicle to

continue to rise over the next several years

Growing commercial vehicle business

Vulnerable to economy cycle Longer product lives of automotive

parts Future prevalence of electric vehicle,

ex:Tesla

Relevant Macroeconomic Trends In 2017, the global automotive

manufacturing industry is forecast to have a volume of 188,398 thousand units, an increase of 37.2% since 2012.

The compound annual growth rate of the industry in the period 2012-17 is predicted to be 6.5%

In 2017, the North American automotive manufacturing industry is forecast to have a volume of 21,666.2 thousand units, an increase of 32.1% since 2012.

The compound annual growth rate of the industry in the period 2012-17 is predicted to be 5.7%.

Source: MARKETLINE

North America automotive manufacturing industry value forecast: $ billion, 2012–17

Global automotive manufacturing industry volume forecast: thousand units, 2012–17

Automotive Manufacturing Industry Volume Forecast: thousand units, 2012–2017

Asia-Pacific India

Europe South America

Source: MARKETLINE

Light Vehicle industry production YoY% Change

Porter’s Five forces Rivalry

CompetitionMED-HIGH

• Numerous players in the industry, including small auto part players and even OEM clients• Overall highly competitive nature of the automobile and commercial vehicle parts

industries

Supplier’s bargaining

powerMED-HIGH

• Too much dependency on substrate and steel provider• Suppliers to this industry tend to be large multinational incumbents, giving them power

over market players

Buyer’s bargaining

powerMED -High

• Large market players have more buying power• Pricing pressure from OEMs.

SubstitutesLOW

• Emission control and ride control are necessary• End user could replace their car with a new one instead of buying replacement parts• Manufacturers will likely be using such products already and industry players already

offer these products

Threat of new entrants

LOW

• Components are usually produced in high volumes, meaning that large capital investment is required from new entrants

• Significant intellectual property is needed, ex: patents and copyrights

Stock Performance

Source: Yahoo Finance

Financial AnalysisProfitability 2011 2012 2013 DORM BWA EO

ROA 5.5% 8.4% 5.8% 17.4% 9.4% 1.1%ROE N/A 123.6% 51.3% 22.0% 18.8% 6.4%Gross Margin 16.2% 16.2% 15.4% 39.3% 20.9% 7.7%EBITDA Margin 8.1% 8.6% 7.9% 20.8% 15.5% 5.9%Net Margin 2.5% 4.1% 2.8% 12.3% 8.4% 0.5%

Asset Utilization 2011 2012 2013 DORM BWA EOAsset Turnover 2.2x 2.0x 2.1x 1.4x 1.1x 2.2xInventory Turnover 12.2x 11.0x 12.1x 2.6x 13.0x 15.0xReceivable Turnover 7.7x 7.6x 7.7x 4.1x 6.2x 10.7xPayables Turnover 5.2x 5.3x 4.9x 8.2x 7.0x 5.7x

Liquidity 2011 2012 2013 DORM BWA EOCurrent Ratio 1.3x 1.3x 1.2x 4.7x 1.7x 0.8xQuick Ratio 0.9x 0.9x 0.9x 2.6x 1.4x 0.5x

Solvency 2011 2012 2013 DORM BWA EOD/E N/A 479.7% 254.5% 0.0% 33.7% 135.8% D/A 36.7% 32.7% 28.8% 0.0% 17.7% 26.8% Interest Coverage 3.5x 4.1x 5.3x N/A 25.0x 2.7x

DuPont Analysis 2011 2012 2013 DORM BWA EOTax Burden 67.5% 94.1% 64.5% 64.1% 71.8% 41.5%Interest Burden 71.5% 75.5% 81.1% 99.9% 101.7% 39.2%Operating Profit Margin 5.3% 5.8% 5.3% 19.3% 11.5% 3.0%Asset Turnover 2.2x 2.0x 2.1x 1.4x 1.1x 2.2xLeverage N/A 14.7 8.8 1.3 2.0 6.0ROE N/A 124% 51% 22% 19% 6%

Greenblatt Ratio 2011 2012 2013 DORM BWA EOEBIT/Tangible Assets 29.7% 29.3% 29.9% 37.1% 36.0% 43.0%EBIT/EV 13.6% 13.8% 9.9% 6.6% 6.5% 11.2%

Source: Tenneco Inc. 2013 10-K, Tenneco Inc. 2010 10-K, Bloomberg

Comparable Companies

Source: Capital IQ, Bloomberg

Comparable Companies

Source: Capital IQ, Bloomberg

Technical Analysis

Source: StockCharts.com

Forecast Assumptions

Source: Tenneco Inc. 2013 10-K, Tenneco Inc. 2010 10-K

2009 2010 2011 2012 2013 Average 2014E 2015E 2016E 2017E 2018EClean Air DivisionAftermarket 315 318 351 318 327 326 338 343 324 344 351 % Growth -12.0% 1.0% 10.4% -9.4% 2.8% 1.2% 3.5% 1.2% -5.3% 6.0% 2.2%Original Equipment OE Substrate 966 1,284 1,678 1,660 1,835 1,485 2,169 2,371 2,167 2,247 2,485 % Growth -35.3% 32.9% 30.7% -1.1% 10.5% 7.6% 18.2% 9.3% -8.6% 3.7% 10.6% OE Value-add 1,638 2,223 2,732 2,948 3,282 2,565 3,814 4,153 3,862 4,585 5,098 % Growth -23.0% 35.7% 22.9% 7.9% 11.3% 11.0% 16.2% 8.9% -7.0% 18.7% 11.2%Total Clean Air Division 2,919 3,825 4,761 4,926 5,444 4,375 6,321 6,866 6,354 7,175 7,935 % of Total Revenue 63% 64% 66% 67% 68% 66% 69% 68% 68% 69% 70% % Growth -26.6% 31.0% 24.5% 3.5% 10.5% 8.6% 16.1% 8.6% -7.5% 12.9% 10.6%Ride Performance DivisionAftermarket 721 851 944 944 953 947 1,020 1,048 1,013 1,013 1,048 % Growth -5.3% 18.0% 10.9% 0.0% 1.0% 4.0% 7.0% 2.8% -3.4% 0.0% 3.5%Original Equipment 1,009 1,261 1,500 1,493 1,567 1,366 1,802 2,162 2,009 2,190 2,332 % Growth -14.3% 25.0% 19.0% -0.5% 5.0% 6.8% 15.0% 20.0% -7.1% 9.0% 6.5%Total Ride Performance Division 1,730 2,112 2,444 2,437 2,520 2,249 2,822 3,211 3,022 3,202 3,380 % of Total Revenue 37% 36% 34% 33% 32% 34% 31% 32% 32% 31% 30% % Growth -10.7% 22.1% 15.7% -0.3% 3.4% 6.0% 12.0% 13.8% -5.9% 6.0% 5.6%Total Tenneco Inc. 4,649 5,937 7,205 7,363 7,964 6,624 9,143 10,077 9,375 10,378 11,315 % Growth -21.4% 27.7% 21.4% 2.2% 8.2% 7.6% 14.8% 10.2% -7.0% 10.7% 9.0%

Forecast Assumptions2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Revenues $7,205 $7,363 $7,964 $9,143 $10,077 $9,375 $10,378 $11,315Cost of Sales 6,037 6,170 6,734 7,735 8,404 7,800 8,614 9,414Gross Margin 1,168 1,193 1,230 1,408 1,673 1,575 1,764 1,901

% of Sales 16.2% 16.2% 15.4% 15.4% 16.6% 16.8% 17.0% 16.8%Goodwill Impairment Charge 11 - - - 5 - 10 - Engineering, Research and Development Expenses 133 126 144 174 232 197 259 249Selling, General and Administrative Expenses 428 427 453 503 615 591 633 713 Depreciation and Amortization of Intangibles 207 205 205 217 235 240 253 256Operating Income 389 435 428 515 586 548 609 683

% of Sales 5.4% 5.9% 5.4% 5.6% 5.8% 5.8% 5.9% 6.0%Loss on Sale of Receivables (5) (4) (4) (8) (8) (8) (9) (9) Other Income (expense) (5) (3) - (9) (10) (23) (21) (11) EBIT 379 428 424 498 568 516 579 662

% of Sales 5.3% 5.8% 5.3% 5.4% 5.6% 5.5% 5.6% 5.9%Interest Expense 108 105 80 110 131 131 145 147EBT 271 323 344 388 437 385 434 515

% of Sales 3.8% 4.4% 4.3% 4.2% 4.3% 4.1% 4.2% 4.6%Income Tax Expense 88 19 122 138 155 137 154 183Net Income (loss) 183 304 222 250 282 248 280 332

% of Sales 2.5% 4.1% 2.8% 2.7% 2.8% 2.6% 2.7% 2.9%Less: Net Income Attributable to Noncontrolling Interests 26 29 39 37 41 39 43 47Net Income (loss) Attributable to Tenneco Inc. 157 275 183 214 240 210 237 286

% of Sales 2.2% 3.7% 2.3% 2.3% 2.4% 2.2% 2.3% 2.5%

Source: Tenneco Inc. 2013 10-K, Tenneco Inc. 2010 10-K

Forecast

Cost of Capital

Source: Tenneco Inc. 2013 10-K, Bloomberg

CAPM Risk-Free Rate 2.75%Market Risk Premium 6.00%5-Year Beta 2.953-Year Beta 2.07CAPM Cost of Equity 15.17%

ROE2011 N/A2012 111.79%2013 42.26%

Year Actual1 -12%2 6%3 48%

Total Realized Return 40.50%

Arithmetic Annual Return 13.68%Geometric Annual Return 12.00%

Annual Realized Returns

Share Price 59.72$ Shares Outstanding (millions) 60 Market Value of Equity (millions) 3,612

Market Value of Debt (millions) 1,102

Percent Equity Weight 77%Percent Debt Weight 23%

Cost of Debt 2.6%Cost of Equity

CAPM 15.17% 70%Realized Return 12.00% 30%

Cost of Equity 14.22%

Tax Rate 35.5%

WACC 11.3%

Discount Rate 11.3%

Weighted Average Cost of Capital

Cost of Equity Weightings

Valuation-DCF

Source: Tenneco Inc. 2013 10-K, Tenneco Inc. 2010 10-K

Tenneco Inc. Discounted Cash Flow Analysis ($ millions)

2014E 2015E 2016E 2017E 2018ETerminal

ValueEBIT 498 568 516 579 662 EBIT*(1-t) 321 366 333 374 427 Depreciation 217 235 240 253 256 Stock-based compensation 15 15 20 20 20 Capital Expenditures (269) (269) (269) (269) (269) Changes in Net Working Capital

Less Increases in Receivables 146 143 (94) 124 102 Less Increases in Inventories 117 67 (60) 81 80 Less Increases in Deferred Income Taxes 2 7 (6) 8 7 Less Increases in Prepayments and Other 33 26 (20) 28 26 Plus Increases in Trade Payables 188 40 (116) 289 203 Plus Increases in Accrued Taxes 24 7 (5) 7 7 Plus Increases in Accrued interest (1) 1 (1) (4) 0 Plus Increases in Accrued liabilities 22 28 (21) 30 28 Plus Increases in Other Current Liabilities (3) 9 (7) 10 9 Total Changes in NWC (67) (159) 29 90 32

Free Cash Flow to Firm 217 188 353 468 466 5,796 PV of FCFF 195 152 256 305 273 3,395 % of EV 4% 3% 6% 7% 6% 74%

Discount Rate 11.3%

Calculation of Implied Share Price Terminal ValueImplied Enterprise Value 4,577 Terminal Growth Rate 3.0%Less Debt 1,102 Marginal Tax Rate 36%Implied Market Cap 3,475

Implied Share Price 57.46$

Valuation-DCF######## 2.0% 2.5% 3.0% 3.5% 4.0%

9.8% 5,081$ 5,366$ 5,693$ 6,072$ 6,517$ 10.8% 4,455$ 4,669$ 4,911$ 5,185$ 5,501$ 11.8% 3,959$ 4,124$ 4,308$ 4,514$ 4,747$ 12.8% 3,556$ 3,686$ 3,830$ 3,990$ 4,167$ 13.8% 3,222$ 3,327$ 3,442$ 3,568$ 3,707$

Implied Enterprise ValueTerminal Growth Rate

Disc

ount

Rat

e

57.46$ 2.0% 2.5% 3.0% 3.5% 4.0%9.3% 71.74$ 77.21$ 83.54$ 90.97$ 99.80$

10.3% 60.07$ 64.10$ 68.70$ 73.96$ 80.07$ 11.3% 50.93$ 54.01$ 57.46$ 61.35$ 65.78$ 12.3% 43.59$ 45.99$ 48.66$ 51.63$ 54.96$ 13.3% 37.56$ 39.48$ 41.59$ 43.92$ 46.49$

Implied Share PriceTerminal Growth Rate

Disc

ount

Rat

e

Implied Share Price

Current Stock Price: $59.72

Weights Implied Share PriceComps 30% $76.44DCF 70% $57.46Implied Share Price $63.15

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