Is Allison (ALSN) A Worthy Pick For Value Investors?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Allison Transmission Holdings, Inc. (NYSE:ALSN) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Allison has a trailing twelve months PE ratio of 9.47, as you can see in the chart below:

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 17.67.If we focus on the long-term PE trend, Allison’s current PE level puts it belowits midpoint of 13.85 over the past five years.Moreover, the current level stands well below the highs for the stock, suggesting that it can be a solid entry point.

Further, the stock’s PE also compares favorably with the Zacks Auto-Tires-Truckssector’s trailing twelve months PE ratio, which stands at 9.59. At the very least, this indicates that the stock is slightlyundervalued right now, compared to its peers.

We should also point out that Allison has a forward PEratio (price relative to this year’s earnings) ofjust9.77,which is higher than the current level. So, it is fair to expect an increase in the company’s share price in the near term.

PEG Ratio

While earnings are certainly important, it is essential to know how much you are paying for the growth of earnings as well. One can easily do that with the PEG ratio (ratio of the P/E to the expected future earnings growth rate).The PEG ratio gives a more complete picture of the valuation of a stock than the P/E ratio.

Allsion’s PEG ratio stands at just 0.99, compared with theZacks Automotive-Original Equipmentindustry average of 1.07. This suggests a slight undervalued trading relative to its earnings growth potentialright now.

Broad Value Outlook

In aggregate, Allison currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Allison a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the PEG ratio for Allison is just0.98, a level that is lower than the industry average of 1.14.The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate.Clearly, ALSNis a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Allison might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth Score of Aand a Momentum Score of D. This gives ALSN a Zacks VGM score—or its overarching fundamental grade—of B. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen oneupward revision in the past sixty days compared to one downward revision, while the full year estimate has seen one upward and six downward revisions in the same time period.

This has had just a dismal impact on the consensus estimate as the current quarter consensus estimate has dropped by 4.3% in the past two months, while the full year estimate has declined by 6.9%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Allison Transmission Holdings, Inc. Price and Consensus

Allison Transmission Holdings, Inc. Price and Consensus | Allison Transmission Holdings, Inc. Quote

Given these trends, the stock has just a Zacks Rank #3 (Hold), which is why we are looking for in-line performance from the company in the near term.

Bottom Line

Allison is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (bottom 20% out of more than 250 Zacks industries) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the Zacks Automotive-Original Equipment industry has clearly underperformed the broader market, as you can see below:

So, value investors might want to wait for estimates and analyst sentimentto turn around in this name first, but once that happens, this stock could be a compelling pick.

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