Since January 2021, the S&P 500 has delivered a total return of 83.7%. But one standout stock has nearly doubled the market - over the past five years, Allison Transmission has surged 156% to $105.96 per share. Its momentum hasn’t stopped as it’s also gained 16.8% in the last six months, beating the S&P by 5.6%.
Is now the time to buy Allison Transmission, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Allison Transmission Not Exciting?
We’re glad investors have benefited from the price increase, but we're swiping left on Allison Transmission for now. Here are three reasons you should be careful with ALSN and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Allison Transmission grew its sales at a mediocre 7.2% compounded annual growth rate. This fell short of our benchmark for the industrials sector.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Allison Transmission’s revenue to drop by 5.8%, a decrease from its 7.2% annualized growth for the past five years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.
3. Recent EPS Growth Below Our Standards
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Allison Transmission’s EPS grew at an unimpressive 6.3% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 1.5% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
Final Judgment
Allison Transmission isn’t a terrible business, but it doesn’t pass our bar. With its shares topping the market in recent months, the stock trades at 14.8× forward P/E (or $105.96 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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