This Investment Could Turn Into a Perfect TEN

Automotive equipment maker Tenneco is in the midst of a strong profit recovery. Earnings per share for 2021 are now estimated at $3.78 or better, reversing an annual loss during COVID-ravaged 2020. The 2022 estimates now focus of EPS bouncing back to nearly $5. TEN changed hands at $22.53 as recently as June 15. Its shares exceeded $61 during each of the five years stretching from 2014 through 2018. As of Wednesday, though, we've been offered the chance to get in at around $17. TEN is not a high flier. Its average price-to-earnings from 2014 through 2019 registered just 9 times. Based on history, its current 4.5-times multiple is about 50% below normal. Assume just an 8 P/E, TEN could be fetching north of $30 right now, and perhaps $39 or so by the end of 2022. June quarter results came in slightly above expectation, at 84-cents versus Yahoo Finance's 79-cent estimate. That was the third consecutive quarterly beat. Trailing 12-month EPS are now $3.94 per share. If next year's estimate proves accurate TEN now sells for less than 3.6x 2022's earnings. Independent research firm Morningstar labels Tenneco a 4-star (out of five) BUY. Morningstar's present-day fair value estimate for TEN sits at $31.50, almost 82% above its Wednesday quote. Clearly there is plenty of upside potential. Owning shares outright is a fine plain vanilla way to qualify for unlimited upside if TEN performs as expected. Option traders can participate in TEN's potential by selling naked puts at $15 or $20 strike prices. They might also wish to consider setting up buy/write combinations out to Jan. 21, 2022. Actual pricing on that expiration date, with TEN at $17.18, is shown below. Shorting naked puts was bringing in generous time premium. The more conservative, out-of-the-money $15 puts provided a greater than 23% margin of safety. In-the-money $20 puts offered almost $5 per share in potential gains while still protecting against adverse moves of up to 11.5%. The table below showed cash flow details on a 1,000-share, 10-call and 10-put $20 strike price, buy/write combination. When executed in a margin-type account with excess free buying power the option premiums can be used to help pay for the shares being purchased. If held through the Jan. 21, 2022 expiration day there are just two possible outcomes. TEN will either close at $20 or above, or below $20. The former situation would deliver the best-case scenario detailed next. Any upturn of at least 16.4% from the trade inception price would morph into a very fine 93.6% cash-on-cash gain. That's equivalent to almost 188% annualized as it covers just a 0.526-year holding period. Making the same 93.6% percentage gain via simply owning stock would require TEN to hit $33.26 by expiration day. What is TEN fails to reach and hold $20? If so, the following worst-case scenario would unfold. Barring a severe decline, though, even that result appears far from scary. The mechanics of this combination offer an 11.7% built-in margin of safety. If TEN holds above $15.17 per share next Jan. 21st the entire combination could be immediately liquidated for at least a small gain. If TEN closes not far below $20 the profit would be significant, and apply to a double-sized (2,000-share) position. At the trade inception starting price of $17.18 per share, it would represent a $4,000 net gain. Tenneco is a high-beta, less than blue-chip name. That doesn't mean you can't make money on it. Buy some shares, sell some puts or consider going with the full combination play.

This Investment Could Turn Into a Perfect TEN

Here's why Tenneco should be part of your portfolio -- and how to play it.

Columnist Conversation

This Weekend on Real Money

We're Adding to a Position on Weakness

AAP Podcast: This Company Is Not Going 'Solo'

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.