Since June 2021, the S&P 500 has delivered a total return of 81.1%. But one standout stock has more than doubled the market - over the past five years, Allison Transmission has surged 180% to $118.17 per share. Its momentum hasn’t stopped as it’s also gained 30.5% in the last six months thanks to its solid quarterly results, beating the S&P by 19.6%.
Is now still a good time to buy ALSN? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.
Why Does Allison Transmission Spark Debate?
Helping build race cars at one point, Allison Transmission (NYSE: ALSN) offers transmissions to original equipment manufacturers and fleet operators.
Two Things to Like:
1. Skyrocketing Revenue Shows Strong Momentum
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Allison Transmission grew its sales at an excellent 12.4% compounded annual growth rate. Its growth surpassed the average industrials company and shows its offerings resonate with customers.
2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and 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 19.2% over the last five years.
One Reason to Be Careful:
Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Looking at the trend in its profitability, Allison Transmission’s operating margin decreased by 5.1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 22.6%.
Final Judgment
Allison Transmission’s merits more than compensate for its flaws, and with its shares topping the market in recent months, the stock trades at 10.4× forward P/E (or $118.17 per share). Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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