ALSN - Allison Transmission Holdings

[Saluki]

Has anyone been looking at this? I haven't seen a thread for it yet.  I started a small position to motivate me to do a deep dive. 

 

Pros: 

 

(according to Yahoo Finance)

Trailing P/E of 10.26

Forward P/E of 9.97

EV/Ebitda of 8.6

 

It's Lou Simpson's biggest position, but not other big names on Dataroma seem to be looking at it. They make transmissions for large trucks (18 wheelers, construction equipment etc), particularly automatic transmissions.  It seems like a company like this can benefit from a growing economy.

 

"Allison Transmission (NYSE: ALSN) is the world's largest manufacturer of fully automatic transmissions for medium- and heavy-duty commercial vehicles, and is a leader in hybrid-propulsion systems for city buses. Allison transmissions are used in a variety of applications including refuse, construction, fire, distribution, bus, motorhomes, defense and energy. Founded in 1915, the company is headquartered in Indianapolis, Indiana, USA and employs approximately 2,700 people worldwide. With a market presence in more than 80 countries, Allison has regional headquarters in the Netherlands, China and Brazil with manufacturing facilities in the U.S., Hungary and India. Allison also has approximately 1,400 independent distributor and dealer locations worldwide. For more information, visit allisontransmission.com."

 

 

The biggest red flag I see is the lack of insider ownership.  The President sold a $2 million in stock in January, and one of the Directors (James A Star), a hedge fund manager has been selling his shares since last year (although this might have something to do with him not sitting for re-election to the BOD).

 

Anyone have any thoughts on this?  Bearish thoughts are particularly welcome.

[walkie518]

Has anyone been looking at this? I haven't seen a thread for it yet.  I started a small position to motivate me to do a deep dive. 

 

Pros: 

 

(according to Yahoo Finance)

Trailing P/E of 10.26

Forward P/E of 9.97

EV/Ebitda of 8.6

 

It's Lou Simpson's biggest position, but not other big names on Dataroma seem to be looking at it. They make transmissions for large trucks (18 wheelers, construction equipment etc), particularly automatic transmissions.  It seems like a company like this can benefit from a growing economy.

 

"Allison Transmission (NYSE: ALSN) is the world's largest manufacturer of fully automatic transmissions for medium- and heavy-duty commercial vehicles, and is a leader in hybrid-propulsion systems for city buses. Allison transmissions are used in a variety of applications including refuse, construction, fire, distribution, bus, motorhomes, defense and energy. Founded in 1915, the company is headquartered in Indianapolis, Indiana, USA and employs approximately 2,700 people worldwide. With a market presence in more than 80 countries, Allison has regional headquarters in the Netherlands, China and Brazil with manufacturing facilities in the U.S., Hungary and India. Allison also has approximately 1,400 independent distributor and dealer locations worldwide. For more information, visit allisontransmission.com."

 

 

The biggest red flag I see is the lack of insider ownership.  The President sold a $2 million in stock in January, and one of the Directors (James A Star), a hedge fund manager has been selling his shares since last year (although this might have something to do with him not sitting for re-election to the BOD).

 

Anyone have any thoughts on this?  Bearish thoughts are particularly welcome.

 

ALSN is a large position for us for some time.

 

There has been some movement in the board room and I believe James Star has sold its entire position.  ALSN was not a primary holding for the fund though there is a fair amount of concentration. 

 

James Star's firm, Longview, largely represents the holdings of the family behind General Dynamic.  If you look at all of Star's recent transactions, you'll see he's been selling everything except for the Alamo position, including General Dynamic.  GD has been having some of its own reorganization, it might be that Star is capitalizing on the run-up in ASLN to do a different deal or pivot into something that would make more sense for the family.  In short, I wouldn't read into the selling. 

 

I would also note that it's highly likely that Simpson and Star know one another.  I believe they both sit on the same board at Northwestern University.

 

As for bearish thoughts, I should note that there has been substantial appreciation already.  My first leg is up around 50% and I started buying in 2016.

 

I think there is a fair amount more room to run and the opportunity Allison is capturing is vast.  Allison has a monopolistic business that shows no material risk for the next decade or two.  As the economy improves, Amazon et al gain more retail dollars, the number of truck drivers continues to decline, there will be more trucks out there with ALSN transmissions since it's hard to teach double-clutch quickly to those who don't know how to drive stick, which to begin is a shrinking pool anyway. 

 

[vince]

Has anyone been looking at this? I haven't seen a thread for it yet.  I started a small position to motivate me to do a deep dive. 

 

Pros: 

 

(according to Yahoo Finance)

Trailing P/E of 10.26

Forward P/E of 9.97

EV/Ebitda of 8.6

 

It's Lou Simpson's biggest position, but not other big names on Dataroma seem to be looking at it. They make transmissions for large trucks (18 wheelers, construction equipment etc), particularly automatic transmissions.  It seems like a company like this can benefit from a growing economy.

 

"Allison Transmission (NYSE: ALSN) is the world's largest manufacturer of fully automatic transmissions for medium- and heavy-duty commercial vehicles, and is a leader in hybrid-propulsion systems for city buses. Allison transmissions are used in a variety of applications including refuse, construction, fire, distribution, bus, motorhomes, defense and energy. Founded in 1915, the company is headquartered in Indianapolis, Indiana, USA and employs approximately 2,700 people worldwide. With a market presence in more than 80 countries, Allison has regional headquarters in the Netherlands, China and Brazil with manufacturing facilities in the U.S., Hungary and India. Allison also has approximately 1,400 independent distributor and dealer locations worldwide. For more information, visit allisontransmission.com."

 

 

The biggest red flag I see is the lack of insider ownership.  The President sold a $2 million in stock in January, and one of the Directors (James A Star), a hedge fund manager has been selling his shares since last year (although this might have something to do with him not sitting for re-election to the BOD).

 

Anyone have any thoughts on this?  Bearish thoughts are particularly welcome.

 

ALSN is a large position for us for some time.

 

There has been some movement in the board room and I believe James Star has sold its entire position.  ALSN was not a primary holding for the fund though there is a fair amount of concentration. 

 

James Star's firm, Longview, largely represents the holdings of the family behind General Dynamic.  If you look at all of Star's recent transactions, you'll see he's been selling everything except for the Alamo position, including General Dynamic.  GD has been having some of its own reorganization, it might be that Star is capitalizing on the run-up in ASLN to do a different deal or pivot into something that would make more sense for the family.  In short, I wouldn't read into the selling. 

 

I would also note that it's highly likely that Simpson and Star know one another.  I believe they both sit on the same board at Northwestern University.

 

As for bearish thoughts, I should note that there has been substantial appreciation already.  My first leg is up around 50% and I started buying in 2016.

 

I think there is a fair amount more room to run and the opportunity Allison is capturing is vast.  Allison has a monopolistic business that shows no material risk for the next decade or two.  As the economy improves, Amazon et al gain more retail dollars, the number of truck drivers continues to decline, there will be more trucks out there with ALSN transmissions since it's hard to teach double-clutch quickly to those who don't know how to drive stick, which to begin is a shrinking pool anyway.

 

Could you handicap the electric drivetrain risk to Allison?  They caim they are in the lead here anyway but would love to here ur thoughts on this.

[Saluki]

Thanks for the info!  I didn't know the background of the board member who was selling, but I was concerned that he was selling big blocks of the stock.   

 

I like the idea of a transmissions business because even with driverless trucks, those trucks still need an engine and transmission to get where they are going, and they already have R&D developed for hybrids and electrified vehicles like city buses, so they are ready to grow into that future market. I remember Mohnish Pabrai mentioning investing in a rubber company in India because he thought more miles driven would mean more tires sold, regardless of whether or not the car was electric or gas.  But in terms of a moat, I think it would be a lot harder to compete with a company like this. 

 

Although their automatic transmissions are pricier than manual, their YouTube videos and investor presentations suggest that there are price savings in lower fuel costs, less training needed, and fewer repairs needed, which would give customers a reason to pay up for a better product.

 

According to their investor presentation, they have higher margins than their competitors and 60% of the automatic transmission market for large vehicles.  It seems like a nice little business that should be trading for more than a 10 P/E so I was wondering whether or not I was overlooking something obvious.

 

Now, back to more research...

 

 

[Liberty]

Can someone explain how they get 40% EBITDA margins?

[Guest Schwab711]

Can someone explain how they get 40% EBITDA margins?

 

The largest contributor to ~31%-32% margins (pre-2013) rising to ~38% today, is price increases (I think I'd map it out if I were to pitch this name but for now I'm just eyeballing). For 2008-2009, there were various one-time costs (like restructuring) included in cost of sales. I'm guessing 'true' gross margins was closer to 41% then.

 

The way they describe 'certain products' (see p.36 2017 10-k) makes it hard to guess how large the price increases have been. I wonder if ALSN is another regulation-related beneficiary like NEU or if this is just the monopolistic-like business Walkie mentioned?

 

 

@Saluki

Part of the 10x is due to the one-time decline in the effective tax rate. Going-forward, the rate should be ~25%.

 

If we back-out one-time items, I see EBT of $581m or proforma NI of $435.75m. That's a P/E of roughly 13x.

 

@Walkie

Nice info and thanks for the opinion. This looks like a really interesting name.

[PullTheTrigger]

there will be more trucks out there with ALSN transmissions since it's hard to teach double-clutch quickly to those who don't know how to drive stick, which to begin is a shrinking pool anyway. 

 

The competitive threat is automated-manual transmissions. They are quickly replacing manual transmissions in on-highway trucks an making inroads in other vocational applications. The driver doesn't use a clutch pedal other than to start and stop.

 

http://www.eaton.com/Eaton/ProductsServices/Vehicle/Transmissions/heavy-duty-automated/index.htm

 

https://www.truckinginfo.com/157497/automated-transmissions-yesterday-today-and-tomorrow

 

Today, commercial vehicle OEMs consistently report take-rates for new long-haul/over-the-road builds solidly around the 75% mark, with Daimler Trucks North America and Volvo Trucks North America eyeballing sales north of the 80% mark. Class 8 vocational sales initially lagged behind the on-highway market segments, but have been rapidly gaining ground the past couple of years.

[Guest Own The Rails]

There's an existing thread on ALSN here: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/allison-transmission-holdings-inc-alsn/

 

Does anyone understand the dynamic of why / when one would need a manual vs. automatic transmission? My basic understanding from a previous (cursory) look was that an automatic transmission is somewhat of a luxury for Class 8 vehicles given they're often driven long distances on straight, flat highways and thus don't require gears to be shifted that often. Am I wrong?

[PullTheTrigger]

These threads should probably be combined.

 

Does anyone understand the dynamic of why / when one would need a manual vs. automatic transmission? My basic understanding from a previous (cursory) look was that an automatic transmission is somewhat of a luxury for Class 8 vehicles given they're often driven long distances on straight, flat highways and thus don't require gears to be shifted that often. Am I wrong?

 

Automatic transmissions are often used in vocational applications. E.G. Trucks on construction sites. Let's say you are driving a truck with a 80,000 lbs of rock/dirt/whatever out of construction or quarry site and you are driving it up an incline. For safety reasons, you can't have any chance of rolling backwards because of driver error, plus you can get enough torque at extremely slow speeds to keep it moving with an automatic transmission.

 

For over the road long haul driving, automatics are rarely used. It's primarily manual-transmissions historically, but as I indicated the big 4 truck manufacturers are quickly moving to use automated manuals with production rates over 75%. Many of the largest fleets that only use newer trucks (less than 5 years old before trading) spec automated manuals for their fleets. It's easier on drivers.

[vince]

Can someone explain how they get 40% EBITDA margins?

 

The largest contributor to ~31%-32% margins (pre-2013) rising to ~38% today, is price increases (I think I'd map it out if I were to pitch this name but for now I'm just eyeballing). For 2008-2009, there were various one-time costs (like restructuring) included in cost of sales. I'm guessing 'true' gross margins was closer to 41% then.

 

The way they describe 'certain products' (see p.36 2017 10-k) makes it hard to guess how large the price increases have been. I wonder if ALSN is another regulation-related beneficiary like NEU or if this is just the monopolistic-like business Walkie mentioned?

 

 

@Saluki

Part of the 10x is due to the one-time decline in the effective tax rate. Going-forward, the rate should be ~25%.

 

If we back-out one-time items, I see EBT of $581m or proforma NI of $435.75m. That's a P/E of roughly 13x.

 

@Walkie

Nice info and thanks for the opinion. This looks like a really interesting name.

I focus on their cash flow and on that basis they have had free cash flow of at least 500 million for 4-5 years running and looks like it will be well over 600 million this year.  They havent paid much in the way of cash taxes but the cash tax rate is rising.  Even still, they are trading at roughly 10 times and growing

[walkie518]

there will be more trucks out there with ALSN transmissions since it's hard to teach double-clutch quickly to those who don't know how to drive stick, which to begin is a shrinking pool anyway. 

 

The competitive threat is automated-manual transmissions. They are quickly replacing manual transmissions in on-highway trucks an making inroads in other vocational applications. The driver doesn't use a clutch pedal other than to start and stop.

 

http://www.eaton.com/Eaton/ProductsServices/Vehicle/Transmissions/heavy-duty-automated/index.htm

 

https://www.truckinginfo.com/157497/automated-transmissions-yesterday-today-and-tomorrow

 

Today, commercial vehicle OEMs consistently report take-rates for new long-haul/over-the-road builds solidly around the 75% mark, with Daimler Trucks North America and Volvo Trucks North America eyeballing sales north of the 80% mark. Class 8 vocational sales initially lagged behind the on-highway market segments, but have been rapidly gaining ground the past couple of years.

 

AMTs are not true automatics.  As noted, Eaton is the competitor in the AMT space, but one should note that Volvo makes its own AMT transmissions for its own trucks.

 

To my knowledge, nothing performs as well or is as fuel-efficient as the comparable ALSN product.

 

There's the electric-truck risk, but I think even Musk will have trouble solving that one.  We will need substantial battery improvements plus the trucks will have to be self-driving before the opportunity for ALSN disappears.  Even then, unless future mgmt is dead from the neck up, ALSN will find a way rather than shrivels up and dies.  ALSN does manufacture hybrid bus transmissions...

 

Another point to note, if it's not in this thread or the other one (which it might be?), are the new regulations on the number of hours truck drivers can drive and how those hours are reported (electronically).  It's likely that this will require additional drivers over what was previously perceived to be the natural rate of attrition. 

 

Not sure how this factors, but it's likely that the drivers get paid more than they have historically to drive less hours, and those drivers will not have to learn how to drive manual or be subject to the beating...

[vince]

there will be more trucks out there with ALSN transmissions since it's hard to teach double-clutch quickly to those who don't know how to drive stick, which to begin is a shrinking pool anyway. 

 

The competitive threat is automated-manual transmissions. They are quickly replacing manual transmissions in on-highway trucks an making inroads in other vocational applications. The driver doesn't use a clutch pedal other than to start and stop.

 

http://www.eaton.com/Eaton/ProductsServices/Vehicle/Transmissions/heavy-duty-automated/index.htm

 

https://www.truckinginfo.com/157497/automated-transmissions-yesterday-today-and-tomorrow

 

Today, commercial vehicle OEMs consistently report take-rates for new long-haul/over-the-road builds solidly around the 75% mark, with Daimler Trucks North America and Volvo Trucks North America eyeballing sales north of the 80% mark. Class 8 vocational sales initially lagged behind the on-highway market segments, but have been rapidly gaining ground the past couple of years.

 

AMTs are not true automatics.  As noted, Eaton is the competitor in the AMT space, but one should note that Volvo makes its own AMT transmissions for its own trucks.

 

To my knowledge, nothing performs as well or is as fuel-efficient as the comparable ALSN product.

 

There's the electric-truck risk, but I think even Musk will have trouble solving that one.  We will need substantial battery improvements plus the trucks will have to be self-driving before the opportunity for ALSN disappears.  Even then, unless future mgmt is dead from the neck up, ALSN will find a way rather than shrivels up and dies.  ALSN does manufacture hybrid bus transmissions...

 

Another point to note, if it's not in this thread or the other one (which it might be?), are the new regulations on the number of hours truck drivers can drive and how those hours are reported (electronically).  It's likely that this will require additional drivers over what was previously perceived to be the natural rate of attrition. 

 

Not sure how this factors, but it's likely that the drivers get paid more than they have historically to drive less hours, and those drivers will not have to learn how to drive manual or be subject to the beating...

Great post

[Saluki]

These threads should probably be combined.

 

Does anyone understand the dynamic of why / when one would need a manual vs. automatic transmission? My basic understanding from a previous (cursory) look was that an automatic transmission is somewhat of a luxury for Class 8 vehicles given they're often driven long distances on straight, flat highways and thus don't require gears to be shifted that often. Am I wrong?

 

Automatic transmissions are often used in vocational applications. E.G. Trucks on construction sites. Let's say you are driving a truck with a 80,000 lbs of rock/dirt/whatever out of construction or quarry site and you are driving it up an incline. For safety reasons, you can't have any chance of rolling backwards because of driver error, plus you can get enough torque at extremely slow speeds to keep it moving with an automatic transmission.

 

For over the road long haul driving, automatics are rarely used. It's primarily manual-transmissions historically, but as I indicated the big 4 truck manufacturers are quickly moving to use automated manuals with production rates over 75%. Many of the largest fleets that only use newer trucks (less than 5 years old before trading) spec automated manuals for their fleets. It's easier on drivers.

 

Here's video comparing Allison Transmission vs a couple of competitors transmissions on a big truck and 25% incline.

 

 

It's pretty scary to see that truck rolling backward if you are in the driver seat.  I don't know the engineering, but it looks pretty impressive vs the competition.

 

[walkie518]

great earnings!

 

ALSN_Q2_2018_Results_Press_Release_30Jul_2018_final3.pdf

ATI_Q2_2018_External_Earnings_Presentation_July_30_2018_final_r1.pdf

[walkie518]

any reason to think this is still fairly cheap here?  mcap/fcf could be around 10x?

[Saluki]

any reason to think this is still fairly cheap here?  mcap/fcf could be around 10x?

 

EV/Ebit is below 10, so it still looks okay, but not ridiculously cheap. I own a small amount of it , about 1% of my portfolio (I started builiding a position, but it started climbing as soon as I bought it and I waited for it to come down, but it's up about 30% in the past couple of months.  I didn't want to pay 5% more, so the jokes on me now). 

 

At this point I'll just sit on it until Jan 1 so I don't have to pay taxes on it if I sell.  If it dipped I would buy more but a couple of other things I like (TPHS and SSW) have come down in the past few weeks so I'm nibbling on those in the meantime. 

[vince]

any reason to think this is still fairly cheap here?  mcap/fcf could be around 10x?

 

Still cheap here cause even if the multiple doesnt grow you are highly likely to get a satisfactory return.  Starting with a 10 percent yield I believe current fcf is at least representative of current earning power and very likely to grow at modest rates.....10 percent yield plus the growth rate, assuming a constant multiple is a very good return indeed and provides a nice margin of safety against rising interest rates. 

[Krapdivad]

Allison transmissions is a mature business with a strong brand moat throwing off high free cash flows, consistent dividends, and repurchasing a lot of stock. It's been basically trading sideways as people looked to stay away from cyclical stocks as the bull market kept marching on. It may also have been unpopular as the electric vehicle revolution has been taking off, while ALSN is viewed as a typical low growth steady boring value stock.

 

Allison has had the majority of the automatic transmission market in Class 6-8 trucks (think dump trucks, school buses, moving trucks, other construction trucks, any big truck doesn't "hinge" like tractor trailers). These vehicles encounter a lot of city traffic and/or construction sites and encounter frequent stop and go situations. Automatic transmissions allow much simpler and efficient operation of these vehicles, which Allison can customize and service for each customer. 

 

If there's a shift to more value play stocks and the economy starts up again with the vaccine rollout, we could see Allison get even more aggressive with their share repurchases, turning this into an "uber cannibal" as Mohnish puts it.