Deteriorating ICE Market Will Restrain Future Outlook With Limited Relief

Key Takeaways

• Heavy reliance on internal combustion transmissions and slow electrification expose the company to declining revenue and heightened competitive threats amid industry shifts.
  
• High customer concentration and recent debt-financed acquisitions add financial risk and earnings volatility, especially as demand for legacy products potentially erodes.
  
• Expansion via acquisitions, electrified systems innovation, defense contracts, strong pricing power, and aftermarket services position Allison for diverse, resilient, and margin-protective growth.

Catalysts

Designs, manufactures, and sells fully automatic transmissions for medium- and heavy-duty commercial vehicles and medium- and heavy-tactical U.S.

• The accelerating global shift toward electric vehicles and zero-emission powertrains is likely to erode long-term demand for Allison's core automatic transmission products, threatening sustained revenue growth as commercial fleets transition away from internal combustion engine vehicles.
  
• Unrelenting regulatory pressure worldwide-including stricter emissions and fuel efficiency standards-favors proliferation of alternative powertrains and could shrink Allison's addressable market, ultimately reducing top-line growth and putting future margin expansion at risk.
  
• Allison's business remains heavily skewed toward traditional ICE-driven transmissions, and its slow diversification into electrified propulsion exposes the company to a secular decline, making it likely that both revenue streams and overall earnings will be structurally challenged within the next decade.
  
• The risk of technology obsolescence is intensifying as OEMs and new entrants invest heavily in integrated EV drivetrains and software-defined powertrain solutions, suggesting Allison may experience market share loss and downward pressure on both gross margins and long-term profitability.
  
• Heavy customer concentration in North American on-highway and defense markets introduces earnings volatility, and the costly, debt-financed acquisition of Dana's Off-Highway business may compound financial risks if the acquired ICE-heavy portfolio sees erosion faster than synergy realization, pressuring free cash flow and future net income.

Allison Transmission Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Allison Transmission Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Allison Transmission Holdings's revenue will grow by 2.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 23.8% today to 22.8% in 3 years time.
• The bearish analysts expect earnings to reach $775.4 million (and earnings per share of $10.11) by about August 2028, up from $762.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.2x on those 2028 earnings, up from 9.6x today. This future PE is lower than the current PE for the US Machinery industry at 23.3x.
• Analysts expect the number of shares outstanding to decline by 4.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.76%, as per the Simply Wall St company report.

Allison Transmission Holdings Future Earnings Per Share Growth

Risks

• Allison's successful acquisition of Dana's Off-Highway business will expand its global footprint, diversify its product portfolio into high-growth markets like agriculture and construction, and enable revenue growth outside its traditional North American base, which can drive top-line growth and improve long-term earnings potential.
  
• The company's active investment and advancements in electrified and hybrid propulsion systems, as seen by orders for eGen Flex and participation in the U.S. Army's Next Generation Electrified Transmission program, better position Allison to capture emerging demand for clean propulsion and maintain or grow revenues as fleets transition to alternative fuels.
  
• Robust growth in the defense segment, evidenced by recent sizable contract wins in the U.S. and Europe, offers Allison a resilient revenue stream that is less correlated with economic cycles, which could buoy both revenues and net margins during periods of softness in commercial markets.
  
• Allison's pricing power, demonstrated by strong year-over-year pricing gains and the ability to pass through most steel and aluminum cost increases to OEM customers, supports stable or expanding gross and net margins even in volatile input cost environments.
  
• The company's focus on aftermarket parts and services, combined with continued high capture rates for aging fleets, creates a high-margin, recurring revenue base that offers resilience for profitability and steady cash flows even during periods of deferred capital investment by end users.

Valuation

• The assumed bearish price target for Allison Transmission Holdings is $84.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Allison Transmission Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $129.0, and the most bearish reporting a price target of just $84.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.4 billion, earnings will come to $775.4 million, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $87.73, the bearish analyst price target of $84.0 is 4.4% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.