Even though Allison Transmission (currently trading at $125.25 per share) has gained 7.1% over the last six months, it has lagged the S&P 500’s 13.1% return during that period. This might have investors contemplating their next move.
Taking into account the weaker price action, does ALSN warrant a spot on your radar, or is it better left off your list? Find out in our full research report, it’s free.
Why Are We Positive on ALSN?
Helping build race cars at one point, Allison Transmission (NYSE:ALSN) offers transmissions to original equipment manufacturers and fleet operators.
1. Skyrocketing Revenue Shows Strong Momentum
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Allison Transmission’s sales grew at an exceptional 14.3% compounded annual growth rate over the last five years. Its growth surpassed the average industrials company and shows its offerings resonate with customers.
2. Outstanding Long-Term EPS Growth
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Allison Transmission’s EPS grew at 17.7% compounded annual growth rate over the last five years, higher than its 14.3% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.
3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
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 19.2% over the last five years.
Final Judgment
These are just a few reasons why we think Allison Transmission is a high-quality business. With its shares underperforming the market lately, the stock trades at 11.4× forward P/E (or $125.25 per share). Is now the right time to buy? See for yourself in our full research report, it’s free.
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