Shifting Perceptions Around Allison Transmission

When I last wrote about Allison Transmission (NYSE:ALSN) in September of 2016, I thought the shares had decent appeal as a buy-and-hold ahead of a recovery in commercial trucks, an eventual recovery in energy, and ongoing growth in commercial automatic transmission penetration rates outside of North America. The shares have exceeded my expectations since then, up about 35%, as companies like Allison and Cummins (NYSE:CMI) have benefited from improving build rates in commercial vehicles.

At today's valuation, I'm more nervous about making a “buy” call. Allison has been logging nice beat-and-raise quarters, and I think Allison's management is quite good. What's more, energy and defense are still barely contributing to results right now and should offer more in the next few years, while OUS adoption of automatic transmissions remains a long-term driver. The “but” is the prospect of accelerating timelines for the adoption of electric vehicles in the commercial space – attention on this market has increased to a point where Cummins, Daimler, Volvo, Navistar (NYSE:NAV), and even typically-conservative PACCAR (NASDAQ:PCAR) have all come out with commentary on their plans/roadmaps for future EV's. Actual adoption of EVs in commercial applications like refuse hauling, metro transit, and straight Class 8's is likely to take many years, but I'd be careful paying up for a cyclical company that could be facing meaningful market erosion within the next decade.

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Shifting Perceptions Around Allison Transmission