EUR 850.00 For Business Accounts Only

Morningstar | Initiating Coverage on Narrow-Moat Allison Transmission With FVE of $54; Shares Undervalued

We are initiating coverage on Allison Transmission Holdings with a narrow moat rating and a fair value estimate of $54. Allison plays an important role in the truck manufacturing and heavy equipment industries as the only stand-alone manufacturer of commercial fully automatic transmissions. These products serve as more efficient alternatives to manual and automated manual transmissions, or AMTs. In vehicles that stop frequently, Allison’s products offer superior fuel economy and a better operator experience than manual transmissions. As fuel savings and labor productivity continue to be key themes in developed markets, Allison is poised to take any market share that isn’t lost by electrification. Moreover, in many developing markets, manual transmissions are dominant due to the lower upfront costs. As labor costs rise in these regions, Allison is likely to sell more of its products that command a $3,000 to $11,000 price premium over manual transmissions.

Allison sits in an enviable position in that it is the only pure-play commercial automatic transmission provider that has over 60% of the North American on-highway share. Its brand has cachet, as the Allison name is often included with vehicle marketing materials due to the importance of transmission options that can influence the vehicle purchasing process.

With commercial electric vehicles on the horizon, Allison is taking steps to preserve its relevance. Electrified powertrains will not require a key piece of technology used in automatic transmissions called a torque converter, which is a type of fluid coupling that transfers power from an internal combustion engine to a series of shafts and gears that ultimately propel the vehicle. In April of 2019, Allison acquired two commercial vehicle businesses—Vantage Power and AxleTech’s electric vehicle systems division. While neither business has significant revenue, they provide Allison with a broad range of electric powertrain intellectual property.

Our recent research into the commercial electric vehicle industry suggests that major threats to entrenched commercial vehicle manufacturers are greater than 10 years away. Unfortunately for Allison, commercial vehicles best suited for its automatic transmission technology, such as those with frequent stops serving a small geographic area, can be served by electric powertrains with existing battery technology. We therefore like Allison’s position in the Class 4-5 truck market in its supply agreement with Navistar that will ultimately allow Allison to take market share from Ford, which is the second-largest manufacturer of commercial fully automatic transmissions. These share gains should offset losses by new entrant electric truck and van manufacturers.