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Allison Transmission (ALSN) Up 6.7% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Allison Transmission (ALSN). Shares have added about 6.7% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Allison Transmission due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Allison's Q1 Earnings & Sales Fall Y/Y in Q1

Allison Transmission reported first-quarter 2020 earnings of $1.20 per share, beating the Zacks Consensus Estimate of 94 cents. The reported figure, however, was lower than the year-ago quarter’s $1.32 per share. Net income in the first quarter was $139 million compared with $167 million recorded in the year-ago quarter. The downside primarily resulted from lower gross profit and elevated product-initiative spending.

In the reported quarter, net sales declined 6% year over year to $637 million due to lower demand in the North America On-Highway and Outside North America On-Highway end markets. The figure, however, outpaced the Zacks Consensus Estimate of $597 million. Gross profit decreased 9% year over year to $326 million. Gross margin was 51.2% compared with the prior-year quarter’s 53.2%. The downside primarily stemmed from lower net sales and unfavorable mix, partially offset by favorable material costs.

Quarter in Detail

Allison segregates its revenues by the end markets served, which are as follows:

Net sales in the North America On-Highway end market decreased 7% year over year to $352 million due to lower demand for rugged duty series models. The reported figure, however, beat the Zacks Consensus Estimate of $317 million.

Net sales in the North America Off-Highway end market tanked 43% year over year to $8 million. Fluctuations in the demand for hydraulic fracturing applications resulted in the decline. However, the sales figure surpassed the Zacks Consensus Estimate of $3.45 million.

Net sales in the Defense end market climbed 25% to $40 million, owing to higher tracked vehicle demand. The figure also surpassed the Zacks Consensus Estimate of $39 million.

The Outside North America On-Highway end market’s net sales slid 23% to $72 million, thanks to the bleak demand in Europe and Asia. The metric also missed the Zacks Consensus Estimate of $84 million.

Net sales in the Outside North America Off-Highway end market was flat at $27 million with the same period in 2019, driven by higher demand in the energy sector, offset by lower demand in the mining and construction sectors. However, the reported figure beat the Zacks Consensus Estimate of $18.26 million.

Net sales in the Service Parts, Support Equipment &Other end market rose 5% to $138 million, driven by aluminum die casting component volume associated with the Walker Die Casting acquisition. It also surpassed the Zacks Consensus Estimate of $130 million.

Financial Position

Allison had cash and cash equivalents of $114 million as of Mar 31, 2020, compared with $192 million as of Dec 31, 2019. As of Mar 31, 2020, long-term debt stood at $2,512 million, unchanged from Dec 31, 2019. The long-term debt-to-capital ratio stands at 78.4%.

In the March-end quarter, the company’s net cash provided by operating activities was $148 million compared with the year-ago quarter’s $194 million. Adjusted free cash flow in the reported quarter was $127 million compared with the prior-year quarter’s $175 million.

During the quarter under review, the company bought back $180 million shares and increased the quarterly dividend payment to 17 cents per share.

2020 Outlook

Allison scrapped the previously issued 2020 guidance as it expects that the coronavirus pandemic’s impacts to strain its operations in the days to come. For 2020, the company lowered the capital expenditure target by approximately 35% from that reported in 2019.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -53.52% due to these changes.

VGM Scores

At this time, Allison Transmission has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Allison Transmission has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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