Allison Transmission: We Like the Margin of Safety That Allison’s Stock Presents

We’re initiating coverage on Allison Transmission ALSN, 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.

Allison’s exposure to international markets presents an attractive opportunity in future. Typically, fleet owners in these markets choose less expensive manual transmissions. As emissions regulations proliferate over the next decade, we think Allison will see increasing demand for its more fuel-efficient transmissions. Currently, penetration rates for automatic transmissions are 5%, illustrating there is ample opportunity for Allison to gain business over the next few years. Furthermore, the demand environment in North America remains solid. Recall, supply chains have constrained the truck market, giving us reason to believe the current cycle will be extended. On top of that, fleet ages are ticking up, meaning fleet owners will likely renew their fleets even if demand cools. Putting these factors together, we think it’s reasonable to assume Allison’s top-line increases by nearly 4% over the next five years.

Overall, we like the strength of Allison’s traditional business as well as the company’s commitment to investing for the future. We think the market is discounting Allison’s ability to take the strong returns of its traditional business and invest in next-generation technologies like e-axles. Allison is focusing on axles as the key integration point for commercial vehicles of the future.