Allison Transmission Doesn't Look Expensive, But Uncertainties Are Everywhere

 

There are always uncertainties with investing, but Allison Transmission (ALSN) has more than its fair share. In the short term, there are uncertainties over how supply chains will evolve in the second half of 2021 and what that means for peak truck production for this cycle (likely 2022). Over the longer term, there are huge uncertainties as to how much EV penetration will disrupt this company’s lucrative automatic transmission business, to what extent they’ll participate in e-axles/e-propulsion, and what the margins for those systems will look like.

It’s fair to give Allison management the benefit of the doubt given past performance, but the scale of market transformation that’s coming makes that a riskier call in my mind. I think Allison has the technological capabilities to stay relevant in “electrucks” (my own slang for electrified trucks), but future margins are a real question.

I do think Allison is undervalued if it can maintain long-term revenue growth of 2% or more, with long-term FCF margins in the mid-teens (versus a trailing average of around 23%). In the shorter term, leverage to stronger production rates and improving margin leverage should support a fair value in the low $40’s or better.

 

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Allison Transmission Doesn't Look Expensive, But Uncertainties Are Everywhere