Finding Quality In An Expensive Market: Allison Transmission (ALSN)

Core Insights - The article emphasizes the importance of thorough analysis during earnings season, highlighting that successful investing requires more than just surface-level metrics and press releases [2][3] Company Analysis - Allison Transmission Holdings Inc. (ALSN) has demonstrated consistent growth, with revenue and net operating profit after tax (NOPAT) increasing by 4% and 9% compounded annually since 2014, respectively [6] - The NOPAT margin for Allison Transmission improved from 15% in 2014 to 25% in the trailing twelve months (TTM), while invested capital turns increased from 0.5 to 0.8 during the same period [6] - The return on invested capital (ROIC) for Allison Transmission rose from 8% in 2014 to 19% in the TTM, indicating enhanced operational efficiency [6] Valuation Insights - At a current price of $95 per share, Allison Transmission has a price-to-economic book value (PEBV) ratio of 0.9, suggesting that the market anticipates a permanent decline of 10% in NOPAT from TTM levels, which appears overly pessimistic given the company's historical growth [8] - Even with a conservative estimate where NOPAT margin falls to 22% and revenue grows by only 3% compounded annually through 2034, the stock could be valued at $127 per share, representing a 34% upside [9] Financial Adjustments - Significant adjustments were made in financial filings, including nearly $150 million in income statement adjustments, resulting in a net effect of removing under $100 million in non-operating expenses [10] - Over $2 billion in adjustments were made to the balance sheet to calculate invested capital, with a net decrease of over $600 million, particularly notable for deferred tax assets [11] - Valuation adjustments totaled under $4 billion, leading to a net decrease of over $2 billion in shareholder value, with significant adjustments for total debt and excess cash [11]