Company Reports

We’ve grown more optimistic on Allison Transmission's near-term sales and margin prospects. We forecast sales to increase by 3% in 2024, thanks to solid demand across the company's end markets. We expect adjusted operating margin to come in at 30.4% this year, 10 basis points above 2023 levels. We have increased our fair value estimate to $84 per share from $79.

We believe Allison will continue to be the top supplier of truck transmissions, despite increasing regulation of emissions by government authorities. The company dominates the medium-duty market, commanding approximately 80% share in some verticals (school buses, Class 6-7 trucks, and Class 8 straight trucks). Allison's strong brand is underpinned by its high-performing and extremely durable transmissions. This has led to the company benefiting from pricing power.

We believe Allison will continue to be the top supplier of truck transmissions, despite increasing regulation of emissions by government authorities. The company dominates the medium-duty market, commanding approximately 80% market share in some verticals (school buses, Class 6 to 7 trucks, and Class 8 straight trucks). Allison's strong brand is underpinned by its high-performing and extremely durable transmissions. This has led to the company benefiting from pricing power.

Allison posted strong fourth-quarter earnings, ahead of our expectations. We increased our fair value estimate by 7% to $79 per share (from $74 previously). The key changes to our cash flow model include stronger sales and margin expectations in 2024 and the time value of money since our last update.

We believe Allison will continue to be the top supplier of truck transmissions, despite increasing regulation of emissions by government authorities. The company dominates the medium-duty market, commanding approximately 80% market share in some verticals (school buses, Class 6 to 7 trucks, and Class 8 straight trucks). Allison's strong brand is underpinned by its high-performing and extremely durable transmissions. This has led to the company benefiting from pricing power.

We believe Allison will continue to be the top supplier of truck transmissions, despite increasing regulation of emissions by government authorities. The company dominates the medium-duty market, commanding approximately 80% market share in some verticals (school buses, Class 6 to 7 trucks, and Class 8 straight trucks). Allison's strong brand is underpinned by its high-performing and extremely durable transmissions. This has led to the company benefiting from pricing power.

Allison reported solid third-quarter earnings, thanks to strong demand for the company's transmissions in medium-duty and vocational trucks. Consolidated sales were up nearly 4% year on year, largely due to strength in Allison's North America on-highway (up over 10%), defense (up nearly 23%), and services (up almost 9%) businesses.

We’ve grown more confident in Allison’s ability to transition to zero-emission. This has led us to increase our fair value estimate to $74 from $66 previously. We now think our previous sales and margin expectations were too conservative. Our forecast now assumes nearly 5% average sales growth over the next five years. In our view, the key catalysts for stronger sales growth are greater domestic and international automatic transmission penetration as well as increased electric hybrid and e-powertrain adoption.

We believe Allison will continue to be the top supplier of truck transmissions, despite increasing regulation of emissions by government authorities. The company dominates the medium-duty market, commanding approximately 80% market share in some verticals (school buses, Class 6 to 7 trucks, and Class 8 straight trucks). Allison's strong brand is underpinned by its high-performing and extremely durable transmissions. This has led to the company benefiting from pricing power.

Following second-quarter earnings, we’ve elected to leave our $66 fair value estimate unchanged for Allison. The quarter showed that 2023 is shaping up to be another solid year. The on-highway business globally performed well, growing by a midteens percentage. Solid pricing growth pushed gross margins to expand by 190 basis points in the quarter compared with the same period a year ago.

We believe Allison will continue to be the top supplier of truck transmissions, despite increasing regulation of emissions by government authorities. The company dominates the medium-duty market, commanding approximately 80% market share in some verticals (school buses, Class 6 to 7 trucks, and Class 8 straight trucks). Allison's strong brand is underpinned by its high-performing and extremely durable transmissions. This has led to the company benefiting from pricing power.

We’re initiating coverage on Allison Transmission, with a fair value estimate of $66. Our valuation implies the stock is 27% undervalued, presenting a comfortable margin of safety. We believe the market is not giving the company enough credit for its dominant position in medium-duty commercial vehicles. In Class 6 to 7 trucks, Class 8 straight trucks, and school buses, Allison holds approximately 80% market share. Customers value Allison’s high-quality, extremely reliable, and durable transmissions. We believe the company’s strong brand allows it to benefit from pricing power. Allison’s transmissions are typically quoted $3,000-$11,000 above manual transmissions.

We believe Allison will continue to be the top supplier of truck transmissions, despite increasing regulation of emissions by government authorities. The company dominates the medium-duty market, commanding approximately 80% market share in some verticals (school buses, Class 6 to 7 trucks, and Class 8 straight trucks). Allison's strong brand is underpinned by its high-performing and extremely durable transmissions. This has led to the company benefiting from pricing power.

We are dropping coverage of Allison Transmission. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

We are placing our fair value estimate for Allison Transmission under review as we transition coverage to a new analyst. We plan to publish an updated report and valuation by early December.

Challenges stemming from the coronavirus pandemic affected Allison Transmission Holdings in its fiscal third quarter, as revenue decreased about 49% year over year and gross margin decreased 9%. GAAP EPS dropped to $0.20, a $1 sequential decline. Five of Allison’s six end markets exhibited significant pullbacks this quarter. North America on-highway, Allison’s largest end market, shrank 59% year over year, mainly due to lower product demand as customers lowered capital expenditures in anticipation of headwinds stemming from the pandemic. This is also evidenced in the 39% decrease in the service parts and support equipment end market, where customers are delaying vehicle maintenance, likely due to cost-saving initiatives and overall declines in vehicle usage over the past few months. On a more positive note, Allison won customers in China and Eastern Europe. Its defense end market continues to be strong, with top-line growth of 14% in the quarter. Taking all of this into consideration, we forecast 2020 earnings per share on a GAAP basis will reach $2.37, a 52% decrease from 2019. We are maintaining our fair value estimate of $51.

Despite challenging conditions in the first quarter, Allison Transmission Holdings’ GAAP EPS of $1.20 beat CapIQ consensus of $0.93. Strong sales of defense transmissions and growing penetration into lighter vehicle classes (4 and 5) contributed to the outperformance. Before the coronavirus pandemic disrupted operations, we expected Allison to experience a meaningful hit in many of its end markets that were becoming increasingly conservative with their capital spending. We anticipated this conservatism to be partially offset by robust sales of Class 4-5 transmissions, which more than doubled between 2018 and 2019, due to the success of the Navistar CV and GM Silverado lines that employ them. This appears to have been largely the case. Even with COVID-19 causing disruptions in March, Allison’s largest end market, on-highway, declined a relatively modest 7%. While its core Class 8 straight truck transmission business is already far less volatile than the larger Class 8 tractor market, penetrating into lighter vehicles diversifies its customer base and helps smooth revenue. Yet, we believe fleet belt tightening across customer categories will lead to a greater than 50% volume decline of on-highway vehicles in its 2020 addressable market partially offset by further share gains.

Allison Transmission Holdings is the world’s leading manufacturer of fully automatic transmissions for commercial vehicles. For much of its 100-year existence, Allison was part of General Motors, but it was purchased in 2007 by private equity investor The Carlyle Group, which subsequently took it public in 2012. Because of its long history of providing reliable transmissions for demanding commercial and military applications, the Allison brand maintains a premium cachet. In marketing materials, commercial vehicle makers frequently display the Allison Transmission name prominently along with the engine manufacturer.

Despite volatility in many of its end markets, narrow-moat Allison delivered impressive fourth-quarter results. Adjusted EPS of $1.05 beat CapIQ consensus of $0.87. Revenue of $617 million exceeded consensus estimates of $597 million. Management provided modestly upbeat guidance for 2020 as it anticipates revenue will decline only 10% despite cautious spending by many fleet customers. Fortunately, defense sales will likely increase 13% due to robust sales of M1 Abrams tanks that employ Allison's most expensive transmissions. Considering Allison’s fourth-quarter performance, along with many other moving pieces, we don’t anticipate any material changes to our fair value estimate.

Allison Transmission Holdings is the world’s leading manufacturer of fully automatic transmissions for commercial vehicles. For much of its 100-year existence, Allison was part of General Motors, but it was purchased in 2007 by private equity investor The Carlyle Group, which subsequently took it public in 2012. Because of its long history of providing reliable transmissions for demanding commercial and military applications, the Allison brand maintains a premium cachet. In marketing materials, commercial vehicle makers frequently display the Allison Transmission name prominently along with the engine manufacturer.