Allison Transmission Remains Hard To Value In An 'EV Someday...' World

Summary

• Allison starts the year off on the right foot with a good beat at the revenue and EBITDA line on strong pricing, but guidance still suggests a mild downward trend.
• Allison is increasing its investments in EV technology, as the company looks to stay relevant and competitive in a world where commercial fleet operators start buying electrified trucks.
• Valuing Allison on a long-term FCF basis is almost impossible, but near-term margin-driven EV/revenue still works, and Allison looks more or less fairly-valued today.

What do you do with a very well-run company that enjoys exceptional margins and would still seem to have room to grow share, but is also looking at a possible sea change in its core addressable market that may leave it with much lower content shares and margins? That’s the conundrum with Allison Transmission (NYSE:ALSN) today; management continues to execute well and generate fantastic margins and cash flows for a commercial vehicle components company, but the advent of electrification in commercial trucks threatens its entire business structure.

I do believe that commercial vehicle electrification is a “when, not if” situation, but that leaves plenty of uncertainty over timing, not to mention content (some commercial EVs will still have transmissions). Likewise, while Allison is investing in EV technologies of its own, it’s unlikely to enjoy the same sort of share and margins, but how big will the change be?

I generally make it a policy to step aside if I don’t feel like I have a great handle on valuation, and that applies here to some extent. I’m really not worried about Allison’s future over the next five years or so, but I’d need a price closer to $40 to coax me in.

A Stronger Than Expected First Quarter

This year almost certainly won’t be as strong for Allison as 2018 was (revenue up close to 20%), but the company still got off to a good start with a better than expected quarter.

Revenue rose 2% as reported and closer to 3% on an adjusted basis, beating expectations by more than 2%. The North American On-Highway business was strong (up 11%) on good sales of its Rugged Duty series, and foreign sales were also strong (up 17%), driven by the off-highway business that grew over 100% on strong natural resource and construction-related demand. Defense was down 14%, service and parts were down 13%, and

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.