We Expect Allison To Be the Top Propulsion Player in a Zero-Emission World

We believe Allison ALSN 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.

International markets play an important role in Allison’s growth strategy, where fully automatic transmissions have a penetration rate of just 5%. There’s ample opportunity to gain market share with its high-quality transmissions, which offer better fuel and operator efficiency compared with less expensive manual transmissions. We also think increasing emissions regulations will push more fleet owners to adopt lower-emitting products, a tailwind for Allison.

Additionally, Allison stands to benefit from the electrification of powertrains. So far, the company has made progress in the bus market with its electric hybrid propulsion systems. To date, Allison has brought in over $1.5 billion in sales, illustrating its success with next-generation technologies. Longer term, we expect the company’s e-powertrains to gain favor with customers. Allison is anchoring its zero-emission strategy on e-axles. Before, engines served as the critical integration point for commercial vehicles. Components of the future will be designed with integration in mind, connecting the e-axle, gearbox, e-motor and inverter.

Allison’s high exposure to the medium-duty trucks dampens cyclicality a bit, as spending on new trucks is largely driven by municipal budgets. Allison estimates approximately 30%-40% of the company’s North America on-highway market is tied to municipal spending. In our view, a zero-emission world is inevitable, but we believe Allison will use cash flows from its competitively advantaged traditional business to reinvest in the future. This includes innovating its transmission portfolio as well as developing zero-emission products.