Allison Transmission Running Over The Bears

Whatever the future may look like for Allison Transmission (ALSN) and its role in a post-electric truck world, the company is executing remarkably well today. With solid growth in its core North American truck business augmented by improving demand from energy and mining applications, as well as share gains in trucks outside North America, Allison is posting exceptional incremental margins and forcing bearish sell-siders to trot out “we’re not wrong… we’re just early” calls.

I’m not in the “the sky is going to fall” camp with Allison, but it’s a tough story to model out given the likelihood that electric trucks eventually will grab share in strong core Allison markets like dump trucks, refuse trucks, and other vocational applications like drayage. I believe a key question is whether Allison can continue to gain share in overseas markets (where penetration is low) and whether they can fight off competition from other transmission alternatives like the Cummins (CMI)/Eaton (ETN) JV.

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Allison Transmission Running Over The Bears

Seeking Alpha: Allison Transmission Hoping To Steer Around Declining Truck Orders

About the only nice thing I can say about Allison Transmission's (NYSE:ALSN) performance since my last article on the company is that the shares haven't done as poorly as many other vehicle parts and components companies. Weak energy and commodity-related markets have definitely done some damage to Allison's business in the short term, and the company's progress with share growth in areas like Class 8 metro and non-U.S. On-highway trucking has been sluggish. Add into that the appearance of the North American trucking market rolling over (including very weak Class 8 performance and shrinking bus demand), and I can understand why investors have sold out and moved on.

This is a tough time to consider buying Allison shares. I think the company is well run, and I think the company's technology fits with a growing focus on commercial vehicle powertrains as a source of improved performance, as well as a growing difficulty in finding good commercial drivers/operators familiar with manual transmissions. The catch is that the Class 8 market is just starting a downturn, there aren't any real signs of life in commodity-related businesses, and weak economic performance in 2016 could start dragging down medium-duty truck performance. I believe the long-term opportunities still support an above-average revenue growth rate of around 4% and a share price in or near the $30s, but there is definitely still risk that the 2016-2018 outlook deteriorates and takes the shares down with it.

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Allison Transmission Hoping To Steer Around Declining Truck Orders

Seeking Alpha: Allison Transmission Still Looking At A Multiyear Sales Effort Outside The U.S.

Orders continue to roll in pretty nicely for large commercial trucks, but major suppliers like Cummins (NYSE:CMI), Tenneco (NYSE:TEN), and Allison (NYSE:ALSN) haven't really been showing it in their share prices. Whether it is concerns about weak conditions in Latin America or valuations that got a little overheated earlier in the year, these shares haven't done much since I last wrote about Allison in March.

I thought back in March that valuation might be getting a little stretched, but with this stretch of relative underperformance, I'm getting more positive on Allison. The company will likely see some headwinds created by Ford (NYSE:F) and Volvo (OTCPK:VOLVY), but I like the company's opportunity to leverage its new TC-10 transmission into greater metro Class 8 share. Longer term, the key question remains whether or not the company can coax companies in Europe, Latin America, and Asia to adopt automatic transmissions despite the greater success. I think the process will take some time, but in the meantime Allison offers attractive margins and cash flow leverage, though the valuation is still not an obvious "gimme".

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Allison Transmission Still Looking At A Multiyear Sales Effort Outside The U.S.

Seeking Alpha: Fracking Will Recover, But Can Twin Disc Achieve Better Margins?

I really want to like Twin Disc (TWIN). Not only does this small and almost unfollowed company make the sort of heavy industrial gear that I like, it's a good play on multiple markets that I believe are due to recover. Twin Disc also offers a level of information available to investors that companies 10 times or 100 times larger often fail to offer.

The short-term question is timing - I am confident that fracking, off-highway vehicles, and marine markets will recover, but I'm not so confident about when. The longer-term question is one of margins and operating cash flow generation - if Twin Disc can't generate double-digit operating cash flow margins as a percentage of sales, it is hard to see how Twin Disc's probable streams of cash flow are undervalued today.

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Fracking Will Recover, But Can Twin Disc Achieve Better Margins?