Bank of America Upgrades Allison Transmission to ‘Buy’

Allison Transmission Holdings (ALSN) has a market cap of $4.2 billion. ALSN rose by 3.8% to close at $24.56 per share on March 2, 2016. The stock’s weekly, monthly, and YTD (year-to-date) price movements were 7.5%, 3.3%, and -4.5%, respectively, as of the same day.

Currently, ALSN is trading 6.8% above its 20-day moving average, 3.5% above its 50-day moving average, and 9.6% below its 200-day moving average.

The Guggenheim Mid-Cap Core ETF (CZA) invests 0.66% of its holdings in Allison Transmission. CZA tracks the Zacks Mid-Cap Core Index, a proprietary selected portfolio of 100 midcap stocks that seeks to outperform pure market-cap indexes. The YTD price movement of CZA was -4.1% as of March 1, 2016.

The market caps of Allison Transmission’s competitors are as follows:

• Caterpillar (CAT)—$40.4 billion
• Cummins (CMI)—$17.3 billion
• Thor Industries (THO)—$2.9 billion

Bank of America has upgraded Allison Transmission rating to “buy” from “neutral” and set the price target at $27 from $25 per share.

Allison Transmission reported 4Q15 net sales of $478.2 million, a fall of 12.2% compared to net sales of $544.4 million in 4Q14. The company’s gross profit and operating income fell by 13.1% and 68.4%, respectively, in 4Q15 over 4Q14.

The company’s net income and EPS (earnings per share) fell to $13 million and $0.08, respectively, in 4Q15, compared to $50.5 million and $0.28, respectively, in 4Q14. It reported adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $170.1 million in 4Q15, a fall of 8.2% over 4Q14.

In 2015, ALSN reported net sales of nearly $2 million, a fall of 6.7% YoY (year-over-year). The company reported trade name impairment and environmental remediation of $80 million and $14 million, respectively, in 2015. Its net income and EPS fell to $182.3 million and $1.03, respectively, in 2015, compared to $228.6 million and $1.25, respectively, in 2014.

Meanwhile, ALSN’s cash and cash equivalents and inventories fell by 4.3% and 1.5%, respectively, in 2015. Its current ratio and debt-to-equity ratio rose to 2.0x and 2.7x, respectively, in 2015, compared to 1.8x and 2.3x, respectively, in 2014.

The price-to-earnings and price-to-book value ratios of Allison Transmission are 24.1x and 3.5x, respectively, as of March 2, 2016.

The company has made the following projection for 2016:

• net sales in the range of down 6.5%–9.5%
• adjusted EBITDA margin in the range of 32.5%–34%
• adjusted free cash flow in the range of $400 million–$450 million
• capital expenditure in the range of $65 million–$75 million, which includes maintenance spending of ~$60 million
• cash income taxes in the range of $10 million–$15 million

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