Stock Analysis

Allison Transmission Holdings, Inc.'s (NYSE:ALSN) Prospects Need A Boost To Lift Shares

NYSE:ALSN
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Allison Transmission Holdings, Inc.'s (NYSE:ALSN) price-to-earnings (or "P/E") ratio of 7.9x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 17x and even P/E's above 33x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Allison Transmission Holdings has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Allison Transmission Holdings

pe-multiple-vs-industry
NYSE:ALSN Price to Earnings Ratio vs Industry January 3rd 2024
Want the full picture on analyst estimates for the company? Then our free report on Allison Transmission Holdings will help you uncover what's on the horizon.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Allison Transmission Holdings would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 36%. The latest three year period has also seen an excellent 140% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 6.7% per annum as estimated by the nine analysts watching the company. That's shaping up to be materially lower than the 12% each year growth forecast for the broader market.

In light of this, it's understandable that Allison Transmission Holdings' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Allison Transmission Holdings maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Allison Transmission Holdings that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Valuation is complex, but we're helping make it simple.

Find out whether Allison Transmission Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.