Allison Transmission Holdings Stock Appears To Be Fairly Valued

GuruFocus.com
·4 min read

- By GF Value

The stock of Allison Transmission Holdings (NYSE:ALSN, 30-year Financials) is believed to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $43.15 per share and the market cap of $4.8 billion, Allison Transmission Holdings stock is believed to be fairly valued. GF Value for Allison Transmission Holdings is shown in the chart below.


Allison Transmission Holdings Stock Appears To Be Fairly Valued
Allison Transmission Holdings Stock Appears To Be Fairly Valued

Because Allison Transmission Holdings is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 6.6% over the past five years.

Link: These companies may deliever higher future returns at reduced risk.

It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Allison Transmission Holdings has a cash-to-debt ratio of 0.12, which is worse than 85% of the companies in Vehicles & Parts industry. The overall financial strength of Allison Transmission Holdings is 4 out of 10, which indicates that the financial strength of Allison Transmission Holdings is poor. This is the debt and cash of Allison Transmission Holdings over the past years:

Allison Transmission Holdings Stock Appears To Be Fairly Valued
Allison Transmission Holdings Stock Appears To Be Fairly Valued

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Allison Transmission Holdings has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.1 billion and earnings of $2.61 a share. Its operating margin is 25.66%, which ranks better than 98% of the companies in Vehicles & Parts industry. Overall, the profitability of Allison Transmission Holdings is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Allison Transmission Holdings over the past years:

Allison Transmission Holdings Stock Appears To Be Fairly Valued
Allison Transmission Holdings Stock Appears To Be Fairly Valued

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Allison Transmission Holdings is 6.6%, which ranks better than 72% of the companies in Vehicles & Parts industry. The 3-year average EBITDA growth rate is 3.7%, which ranks in the middle range of the companies in Vehicles & Parts industry.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Allison Transmission Holdings's return on invested capital is 10.24, and its cost of capital is 7.17. The historical ROIC vs WACC comparison of Allison Transmission Holdings is shown below:

Allison Transmission Holdings Stock Appears To Be Fairly Valued
Allison Transmission Holdings Stock Appears To Be Fairly Valued

In summary, Allison Transmission Holdings (NYSE:ALSN, 30-year Financials) stock is estimated to be fairly valued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Vehicles & Parts industry. To learn more about Allison Transmission Holdings stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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