Driving Growth Through Decisive Partnerships And Diversified Markets

Key Takeaways

• Expanding demand in the North American and international markets, along with strategic partnerships, indicate strong potential for revenue growth.
  
• Investments in supply chain efficiency and emerging technologies underscore a commitment to innovation and operational excellence for long-term growth.
  
• Challenges such as increasing production rates, geopolitical uncertainties, and leadership transitions may impact manufacturing efficiency, costs, and earnings growth.

Catalysts

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

• Continued demand for Class 8 vocational vehicles and medium-duty trucks, combined with price increases on certain products, indicate potential for strong revenue growth in the North American On-Highway end market.
  
• Expansion in defense and outside North America On-Highway end markets, driven by increased demand for tracked vehicle applications and higher demand in Asia, could further contribute to revenue growth.
  
• Investments in supply chain and operations to improve manufacturing throughput and meet elevated demand, suggesting improved net margins through operational efficiencies.
  
• Strategic partnership with LGMG and the introduction of the new 6625 Wide Body Dump Series transmissions in the mining equipment sector show potential for significant expansion in product offerings and international market reach, impacting revenue.
  
• Commitment to investing in emerging technologies through Allison Ventures and partnership with Cummins to test and validate natural gas engines paired with Allison transmissions demonstrates a focus on innovation and adaptation to market trends, which could lead to long-term growth in revenues and diversification of energy sources.

Assumptions

• Analysts are assuming Allison Transmission Holdings's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 22.0% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $785.1 million (and earnings per share of $10.35) by about August 2027, up from $684.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $935.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2027 earnings, down from 11.4x today. This future PE is lower than the current PE for the US Machinery industry at 21.8x.
• Analysts expect the number of shares outstanding to decline by 2.68% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

Risks

• Increasing production rates and scale to meet market demand present challenges that could affect manufacturing efficiency and increase operational costs, potentially impacting net margins.
  
• Geopolitical uncertainties and supply chain constraints may lead to increased costs or disruptions in their defense and international markets, affecting revenue and profitability.
  
• Investments in supply chain and operations to improve manufacturing throughput could lead to higher upfront costs, potentially impacting short to medium-term profitability.
  
• Dependence on the North American On-Highway end market and its cyclical nature could pose a risk to revenue stability if there's an unexpected downturn in demand for Class 8 vocational vehicles.
  
• The ongoing search for a new CFO and transition in leadership roles may introduce temporary operational inefficiencies or delays in strategic initiatives, potentially affecting earnings growth momentum.

Valuation

• The analysts have a consensus price target of $89.0 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 $128.0, and the most bearish reporting a price target of just $67.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.5 billion, earnings will come to $785.1 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $89.79, the analyst's price target of $89.0 is 0.9% lower. 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.