Allison Transmission: The Market Yet To Recognize This Compounder

Investment Thesis - Allison Transmission Holdings, Inc. has achieved annual compounded double-digit profit growth over the past decade despite modest revenue growth, indicating strong operational and capital efficiencies [2] - The company is financially sound with a solid capital allocation plan, presenting a valuation with more than a 30% margin of safety at the current market price [2] Business Background - Allison is the largest manufacturer of fully automatic transmissions for medium and heavy-duty commercial and U.S. defense vehicles, also leading in electrified propulsion systems [3] - In 2023, service parts and support equipment sales accounted for 23% of net sales, with North America representing about 52% of total net sales [3] - The global automotive transmission market was valued at USD 62.4 billion in 2023, expected to grow at a CAGR of 6.2% by 2028 [3] Operating Trends - Revenue grew at a 4% CAGR over the past decade, while profit after tax (PAT) grew at 12.7% CAGR, driven by higher revenue and lower Selling, General, and Administration (SGA) margins [5] - SGA margin reduced from 16% in 2014 to 11% in 2023, indicating improved cost control [5] - Operating return averaged 17% compared to a WACC of 9%, and ROE averaged 52% against a cost of equity of 11% [6] Financial Position - As of December 2023, Allison had USD 562 million in cash, representing about 11% of total assets, and a Debt Capital ratio of 0.59, down from 0.73 [12] - The company generated USD 6.7 billion in cash flow from operations over the past decade, with a positive cash flow every year [12] Capital Allocation - The company has a low CAPEX relative to cash flow from operations, returning a substantial portion of funds to shareholders [13] - USD 4.0 billion spent on share buybacks boosted the 2023 EPS to USD 7.48 per share, significantly enhancing shareholder value [13] Valuation - Using a single-stage valuation model, the intrinsic value of Allison is estimated at USD 104 per share, compared to a market price of USD 75 per share, indicating a 30% margin of safety [14] - The valuation assumes a conservative 4% growth rate, with the market pricing based on past revenue averages, suggesting potential upside in intrinsic value [14][19]