FICV Selection And FuelSense Technology Will Broaden Global Opportunities

Key Takeaways

• Allison's selection for India's combat vehicle and Daimler's adoption of its technology could significantly boost international and fuel-efficient market revenues.
  
• Expanding its global service network and sourcing materials from North America protects Allison against trade uncertainties, enhancing profits and shareholder value.
  
• Geopolitical uncertainties, demand fluctuations, and reliance on pricing strategies pose challenges to revenue stability and margin growth for Allison Transmission Holdings.

Catalysts

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

• The selection of Allison's 3040 MX medium-weight cross-drive transmission for India's Future Infantry Combat Vehicle (FICV) prototype positions the company for significant revenue growth from international defense markets, with potential revenue of several hundred million dollars over two decades.
  
• The adoption of Allison's FuelSense 2.0 Neutral at Stop technology by Daimler Truck North America could drive increased revenue by enhancing the efficiency of their Freightliner and Western Star trucks, potentially leading to wider adoption among fleets focused on reducing fuel costs and emissions.
  
• The expansion of Allison's global service network in Japan and West Africa reinforces its ability to support growing demand for automatic transmissions outside North America, which can contribute to revenue growth through increased sales and service opportunities.
  
• Allison's strategic positioning with a substantial portion of direct material spend sourced from North America and long-term supply agreements helps protect profit margins by mitigating the impact of global trade uncertainties and material cost fluctuations.
  
• The company's recent $1 billion increase in stock repurchase authorization, coupled with a strong balance sheet, suggests potential earnings per share (EPS) growth through reduced share count, enhancing shareholder value.

Allison Transmission Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Allison Transmission Holdings's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.5% today to 22.7% in 3 years time.
• Analysts expect earnings to reach $796.3 million (and earnings per share of $10.49) by about May 2028, up from $754.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $973.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from 10.9x today. This future PE is lower than the current PE for the US Machinery industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 3.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.84%, as per the Simply Wall St company report.

Allison Transmission Holdings Future Earnings Per Share Growth

Risks

• The geopolitical tensions and shifting trade policies pose uncertainties in Allison's end markets, potentially impacting future revenues and net margins due to supply chain disruptions or tariff implications.
  
• The potential slowdown in medium-duty truck demand, as indicated by the 3% year-over-year decrease in net sales and lower demand projections for 2025, could lead to reduced revenues and gross profit margins.
  
• The company faces uncertainties in its defense market expansion, despite the positive FICV program contract in India, as geopolitical tensions or changes in funding priorities could impact projected revenues.
  
• Allison's reliance on price increases to drive revenue, with 4.9% price realization in Q1 2025, may not be sustainable long-term if competitive pressures limit further pricing power, potentially impacting revenue stability and earnings.
  
• The relatively flat growth projections in key markets, such as North American vocational and parts businesses, combined with internal inventory management challenges, could constrain revenue growth and pressure margins if market conditions worsen.

Valuation

• The analysts have a consensus price target of $101.2 for Allison Transmission Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $126.0, and the most bearish reporting a price target of just $74.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $796.3 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $97.12, the analyst price target of $101.2 is 4.0% higher. The relatively low difference between the current share price and the analyst consensus 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.