Allison Transmission (ALSN)

Transmission provider Allison Transmission (NYSE:ALSN) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 2.9% year on year to $766 million. On the other hand, the company’s full-year revenue guidance of $3.25 billion at the midpoint came in 2% above analysts’ estimates. Its GAAP profit of $2.23 per share was 8.7% above analysts’ consensus estimates.

Company Overview

Helping build race cars at one point, Allison Transmission (NYSE:ALSN) offers transmissions to original equipment manufacturers and fleet operators.

Heavy transportation equipment companies are investing in automated vehicles that increase efficiencies and connected machinery that collects actionable data. Some are also developing electric vehicles and mobility solutions to address customers’ concerns about carbon emissions, creating new sales opportunities. Additionally, they are increasingly offering automated equipment that increases efficiencies and connected machinery that collects actionable data. On the other hand, heavy transportation equipment companies are at the whim of economic cycles. Interest rates, for example, can greatly impact the construction and transport volumes that drive demand for these companies’ offerings.

Competitors offering similar products include Cummins (NYSE:CMI), Eaton (NYSE:ETN), and BorgWarner (NYSE:BWA).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Allison Transmission’s sales grew at a sluggish 3.8% compounded annual growth rate over the last five years. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about Allison Transmission.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Allison Transmission’s annualized revenue growth of 6.3% over the last two years is above its five-year trend, but we were still disappointed by the results.

Allison Transmission also breaks out the revenue for its three most important segments: North America On-Highway, International On-Highway, and Service and Support, which are 56.8%, 14.6%, and 19.3% of revenue. Over the last two years, Allison Transmission’s revenues in all three segments increased. Its North America On-Highway revenue (propulsion solutions) averaged year-on-year growth of 12.9% while its International On-Highway (propulsion solutions) and Service and Support (parts and equipment) revenues averaged 3.3% and 2.4%.

This quarter, Allison Transmission missed Wall Street’s estimates and reported a rather uninspiring 2.9% year-on-year revenue decline, generating $766 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 2.4% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and suggests its products and services will see some demand headwinds. At least the company is tracking well in other measures of financial health.

Allison Transmission has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 47.7% gross margin over the last five years. That means Allison Transmission only paid its suppliers $52.28 for every $100 in revenue.

This quarter, Allison Transmission’s gross profit margin was 49.3%, marking a 1.3 percentage point increase from 48% in the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Allison Transmission has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 28.8%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Allison Transmission’s operating margin rose by 6.9 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Allison Transmission generated an operating profit margin of 32.5%, up 2.8 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Allison Transmission’s EPS grew at a remarkable 12.5% compounded annual growth rate over the last five years, higher than its 3.8% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Allison Transmission’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Allison Transmission’s operating margin expanded by 6.9 percentage points over the last five years. On top of that, its share count shrank by 25.9%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Allison Transmission, its two-year annual EPS growth of 19.3% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q1, Allison Transmission reported EPS at $2.23, up from $1.90 in the same quarter last year. This print beat analysts’ estimates by 8.7%. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Allison Transmission has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 20.2% over the last five years.

Taking a step back, we can see that Allison Transmission’s margin dropped by 1.2 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Allison Transmission’s free cash flow clocked in at $155 million in Q1, equivalent to a 20.2% margin. This cash profitability was in line with the comparable period last year and its five-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Allison Transmission’s five-year average ROIC was 21.3%, placing it among the best industrials companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Allison Transmission’s ROIC has increased. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

Allison Transmission reported $753 million of cash and $2.4 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.16 billion of EBITDA over the last 12 months, we view Allison Transmission’s 1.4× net-debt-to-EBITDA ratio as safe. We also see its $43 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by Allison Transmission’s optimistic full-year EBITDA guidance, which blew past analysts’ expectations. We were also glad its full-year revenue guidance exceeded Wall Street’s estimates. On the other hand, its revenue missed significantly and its North America On-Highway revenue fell short of Wall Street’s estimates. Overall, this print was mixed but still had some key positives. The stock traded up 3.4% to $96.50 immediately following the results.

Updated: May 16, 2025 at 11:34 PM EDT

Before making an investment decision, investors should account for Allison Transmission’s business fundamentals and valuation in addition to what happened in the latest quarter.

Allison Transmission possesses a number of positive attributes. Although its revenue growth was uninspiring over the last five years and analysts expect growth to slow over the next 12 months, its admirable gross margins indicate the mission-critical nature of its offerings. And while its projected EPS for the next year is lacking, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

Allison Transmission’s EV-to-EBITDA ratio based on the next 12 months is 10.4x. Looking at the industrials landscape right now, Allison Transmission trades at a pretty interesting price. If you trust the business and its direction, this is an ideal time to buy.

Wall Street analysts have a consensus one-year price target of $101.50 on the company (compared to the current share price of $106.16).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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