Allison Transmission struggling to rev up investors

September 15, 2012

Allison Transmission Holdings Inc. is a huge company, with $2.2 billion in revenue and 2,800 employees. But the commercial transmission manufacturer’s March initial public offering didn’t exactly captivate the investment community, which was busy fixating on the latest batch of tech high-fliers.

The challenge is even greater now that a slowdown in Europe and emerging markets like China and Brazil has ratcheted back growth expectations for transportation equipment—everything from Allison’s automatic transmissions to Cummins Inc.’s diesel engines.

As the outlook has dimmed, Allison’s shares have sagged. The stock now trades for around $19.25, well below its $23 IPO price and its all-time high of $25.22 reached in July.

After the stock bottomed at $15.82 in June, some investors began sniffing a bargain. The latest to jump on the bandwagon is the investment firm Oppenheimer & Co., whose analysts on Sept. 5 initiated coverage with a price target of $25.

“As the world’s dominant manufacturer of fully automatic transmissions for medium- and heavy-duty trucks, Allison boasts industry-leading margins, significant [free cash flow] and bountiful growth opportunities,” Oppenheimer’s Ian Zaffino said in a report.

Some other analysts share the upbeat assessment—not because they’re projecting torrid growth anytime soon but because Allison has the financial underpinnings to perform relatively well now and to capitalize when a full-blown economic recovery kicks in.

Indeed, the company was solidly profitable in the second quarter, with operating income of $120 million and sales rising 1 percent, to $559 million. For the full year, the company forecast a sales increase of 1 percent to 3 percent.

That’s not the sort of growth that gets most investors’ adrenalin flowing. But in light of Allison’s post-IPO decline, Baird Equity Research senses opportunity. Baird’s David Leiker noted that, despite overseas expansion, Allison still generates the bulk of its revenue in North America, where its key markets (medium-duty trucks, heavy-duty trucks, school buses and large motorhomes) are expected to grow 5 percent to 8 percent a year through 2014.

Allison remains just a bit player in the slowing Chinese market, where it derives about 5 percent of sales. And its key segment there is buses, a market that has grown 11 of the past 12 months, Leiker said. In contrast, the Chinese truck market is down 11 of the past 12 months.

“We think there is more ‘meat’ behind [the] rally at Allison,” Leiker said in a report, citing the company’s “unique industry exposures.”

Still, even bullish analysts acknowledge the company’s long-term prospects are closely intertwined with the health of the global economy.

Automatic transmissions are used in less than 10 percent of commercial vehicles worldwide. The selling points include better fuel economy and more reliable performance.

Because Allison holds 62 percent of the market for fully automatic transmissions for medium- and heavy-duty vehicles used on highways, it is well-positioned to capitalize as vehicle purchasers embrace the advantages.

But Allison’s transmissions add thousands of dollars to the cost of a vehicle. And with the economy continuing to limp along, many buyers remain content with standard transmissions.

“We believe the transition to fully automatic transmissions will be gradual and believe global competition could still encroach,” Morgan Stanley analyst Vance Edelson said in a report.

Kirr Marbach gets attention

Columbus-based Kirr Marbach & Co., with 10 employees and $470 million under management, is minuscule compared with some of the Wall Street heavyweights it competes with.

But recent national recognition suggests Kirr Marbach’s more than 250 clients, located in 27 states and internationally, aren’t giving up anything in going with a smaller firm.

The September issue of Kiplinger’s Personal Finance lists the Kirr Marbach Partners Value Fund as one of the best-performing midsize-company stock mutual funds for the three years ended June 29. In that span, it posted an annualized return of 23.9 percent, fifth-best on the list.

In addition, The Wall Street Journal this month labeled the same fund a “category king,” citing its total return of 17.3 percent through the first eight months of this year. The performance was seventh-best in the “multi-cap core” category.

“We like to think the national recognition we’ve received shows we can compete with the biggest and very best national investment firms,” said Kirr Marbach Chief Operating Officer Mickey Kim, who also writes an every-other-week investing column for IBJ.•


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