On Tuesday, Oppenheimer maintained an Outperform rating on Allison Transmission Holdings Inc. (NYSE:ALSN) and increased the price target to $90 from the previous $67. The firm attributes the raised target to strong demand in various sectors and anticipated pricing power.
The company, known for its commercial-duty automatic transmissions and hybrid-propulsion systems, is witnessing sustained demand across its defense, construction, and international mining and energy segments. This robust demand is expected to balance out the supply challenges faced in the North American On-Highway market.
Allison Transmission is set to renegotiate about 60% of its North American On-Highway contracts later this year. These contracts are currently operating under pre-COVID terms. The company is projected to achieve at least a 500 basis point increase in price for these contracts starting in 2025, following an overall price increase of around 1000 basis points between 2022 and 2023, which includes the aforementioned North American On-Highway segment.
The firm also forecasts Allison Transmission to continue generating strong free cash flow (FCF), estimating between $575 million and $625 million for the year 2024 and $690 million for 2025. The anticipated FCF is expected to support internal investments and provide returns to shareholders through dividends and share repurchase programs.
The upgrade in the price target reflects the financial institution's confidence in Allison Transmission's future performance, citing strength in the defense and international sectors, potential pricing advantages, and a slower-than-anticipated shift to electric vehicles as key factors for the positive outlook.
InvestingPro Insights
With a keen eye on Allison Transmission Holdings Inc. (NYSE:ALSN), current metrics from InvestingPro reveal a company in a strong financial position. The firm boasts a robust market capitalization of approximately $6.9 billion USD and an attractive P/E ratio of 10.62, which suggests that the stock may be undervalued relative to its earnings. Notably, the company has a PEG ratio of 0.3 for the last twelve months as of Q4 2023, indicating potential for growth when compared to its earnings trajectory.
InvestingPro Tips highlight the company's impressive gross profit margins of 48.43% and its ability to maintain dividend payments for 13 consecutive years, with a recent growth of 19.05% in dividends. These factors, combined with a strong return on assets of 13.88%, paint a picture of a financially healthy and stable company. Additionally, with a 1 Year Price Total Return of 86.84% and trading near its 52-week high at 99.4% of the peak price, investors may find Allison Transmission an attractive prospect.
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