Allison Transmission Holdings (ALSN) is a mid-cap manufacturer of vehicle transmissions. Many investors view this company as a low-margin producer of car and light truck transmissions that is destined for obscurity in an electric vehicle world. But that’s misguided for a key reason, counsels Bruce Kaser, editor of Cabot Value Investor.

You see, Allison actually produces no car or light truck transmissions. Rather, it focuses on the school bus and Class 6-8 heavy-duty truck categories, where it holds an 80% market share.

Its EBITDA margin is sharply higher than its competitors and on par with many specialty manufacturers. And it is a leading producer and innovator in electric axles which all electric trucks will require.

The company generates considerable free cash flow and has a low-debt balance sheet. Its capable leadership team keeps its shareholders in mind, as the company has reduced its share count by 38% in the past five years.

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On Oct. 25, Allison reported another strong quarter, with adjusted earnings of $1.76 per share increasing 21% and coming in 4% above estimates. Revenues rose 4%, but were 4% below estimates. Adjusted EBITDA of $267 million rose 9%, but was 2% below estimates.

Management reiterated their full-year 2023 guidance that showed sales and profit resilience (sales up 8%, Adjusted EBITDA up 12%) but didn’t raise their guidance. The balance sheet remains impressively strong.

Allison shares fell, likely due to the revenue “miss” and perhaps due to a perception that the current business cycle has peaked and is likely to roll over. Year-over-year sales growth rates have decelerated in all but the Defense end market and have turned negative in the small-ish Off-Highway market, lending credence to investor worries.

But we continue to see Allison as a rare gem – a well-managed, healthy-moat, and shareholder-friendly company. Given the sell-down in the shares, we have returned the shares to a “Buy”.

Recommended Action: Buy ALSN

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