2 Reasons to Like ALSN and 1 to Stay Skeptical

Over the last six months, Allison Transmission’s shares have sunk to $90.02, producing a disappointing 6.3% loss - a stark contrast to the S&P 500’s 15.5% gain. This might have investors contemplating their next move.

Given the weaker price action, is this a buying opportunity for ALSN? Find out in our full research report, it’s free.

Why Does Allison Transmission Spark Debate?

Helping build race cars at one point, Allison Transmission (NYSE:ALSN) offers transmissions to original equipment manufacturers and fleet operators.

Two Things to Like:

1. Elite Gross Margin Powers Best-In-Class Business Model

At StockStory, we prefer high gross margin businesses because they indicate the company has pricing power or differentiated products, giving it a chance to generate higher operating profits.

Allison Transmission has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 47.9% gross margin over the last five years. That means Allison Transmission only paid its suppliers $52.12 for every $100 in revenue.

2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Allison Transmission has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 20.2% over the last five years.

One Reason to be Careful:

Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Allison Transmission grew its sales at a mediocre 6.8% compounded annual growth rate. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about Allison Transmission.

Final Judgment

Allison Transmission’s positive characteristics outweigh the negatives. After the recent drawdown, the stock trades at 13.1× forward EV-to-EBITDA (or $90.02 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.

Stocks We Like Even More Than Allison Transmission

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