Assessing ValueAct Capital Management's fourth quarter positions (Part 6 of 8)
ValueAct Capital and Allison Transmission Holdings
ValueAct initiated a new position in Dresser-Rand Group, Inc. (DRC). It sold its stakes in CF Industries (CF), The Mosaic Company (MOS), and Valero Energy Corporation (VLO). The fund increased positions in Allison Transmission Holding (ALSN) and MSCI Inc. (MSCI). It reduced its stake in Adobe Systems Incorporated (ADBE).
ValueAct Capital, co-founded by Jeffrey Ubben, upped its stake in Allison Transmission Holding (ALSN) from 4,625,204 shares to 18,025,204 shares, last quarter. The shares account for a 9.9% of the company’s outstanding common stock. The position was initiated in 3Q and currently accounts for 4.18% of the fund’s fourth quarter portfolio.
Allison Transmission Holdings is the world’s largest manufacturer of fully-automatic transmissions for medium- and heavy-duty commercial vehicles and medium- and heavy-tactical U.S. defense vehicles. Allison sells transmissions globally for use in medium- and heavy-duty on-highway commercial vehicles, off-highway vehicles and equipment and defense vehicles. Along with the sale of transmissions, it also sells branded replacement parts, support equipment and other products necessary to service the installed base of vehicles utilizing transmissions. It has 13 transmission product lines with over 100 different product models. Although approximately 77% percent of revenues are generated in North America, the company has a presence in Europe, Asia, South America and Africa.
For the fourth quarter of 2013, Allison Transmission’s results missed earnings estimates but beat on revenue. The company reported net sales for the quarter of $491 million, a 1% increase from the same period in 2012. Profit for the quarter increased to $78 million, compared to $46 million for the same period in 2012. Earnings per share for the quarter was $0.23 cents compared with $11.2 million or $0.06 a share, a year ago.
The management said that net sales stabilized in the fourth quarter on a year-over-year basis, an improvement relative to the sales declines experienced through the first three quarters of the year. The growth was driven by higher demand in the Service Parts, Support Equipment & Other end market, and continued recovery in the North America On-Highway end market. Improved demand conditions in the Outside North America On-Highway end market largely offset by previously contemplated reductions in U.S. defense spending, and weakness in the Outside North America Off-Highway end market. Its North America Off-Highway end market continues to be weak, but experienced some modest sequential improvement.
Allison saw strong operating margins and cash flow during the fourth quarter by executing initiatives designed to align costs and programs across its business with end markets demand conditions while continuing to invest in growth opportunities. Selling, general and administrative expenses for the quarter were $87 million, a decrease of 22% from $112 million for the same period in 2012.
Allison expects 2014 net sales to increase in the range of 3% to 6%, an Adjusted EBITDA margin in the range of 32% to 34%. It assumes a continued recovery in the North America On-Highway end market. According to ACT Research, commercial truck and bus production volumes in Allison’s North American on-highway markets are projected to grow, but to remain below the 1998-2008 average production levels through 2015. It anticipates lower demand in the North America Hybrid-Propulsion Systems for Transit Bus end market due to engine emissions improvements and non-hybrid alternative technologies that generally require a fully-automatic transmission (for example, xNG).
Allison has also factored into its guidance a slowly emerging improvement in demand from the North America energy sector’s hydraulic fracturing market, and previously considered reductions in U.S. defense spending to longer term averages experienced during periods without active conflicts. It expects growth in the Outside North America On-Highway end market, moderately improved second half demand conditions in the Outside North America Off-Highway end market, and higher demand in the Service Parts, Support Equipment & Other end market.
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