Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Allison Transmission Insiders Want Out

Allison Transmission Holdings (NYSE: ALSN  ) recently announced a super-sized secondary share offering of up to 23.8 million shares -- every one of which will be sold by existing shareholders, and not one of which will generate cash for the company itself. Actually, the contrary.

That's the upshot of this week's news. Not the fact that Allison increased the size of share offering by 25% (from an initially anticipated size of 16.6 million shares). Not the fact that Allison committed to buying back 4.7 million shares from the selling shareholders before these shares even hit the market. What's really important here is that:

  1. Allison will be no richer for the fact of these shares going on the market
  2. Allison will actually become poorer
  3. The people selling are insiders who want out of Allison
  4. They're right to want to want out

Let's take those one at a time. First off, the shares being sold under this offering are owned primarily by private equity firms Onex Corporation (TSX: OCX  ) and the Carlyle Group (NASDAQ: CG  ) , which each own approximately 34.5% of Allison. As such, it will be Onex and Carlyle reaping the gains from this stock sale -- not Allison. Indeed, Allison must ante up about $100 million to take off the market the 4.7 million shares it has committed to buy back. So Allison is actually getting poorer, not richer.

As for the sellers, and why they want to (sell), these private equity firms are what are commonly referred to as the "smart money" in stock investing. With Allison shares up 30% off their lows of last September, Onex and Carlyle are getting out while the getting is good. But if the smart money is selling, the question is whether you should want to buy?

The answer, I think, is "no." Here's why. At current prices, Allison shares cost 35 times trailing earnings. Even with strong free cash flow, the shares command a steep "enterprise value" of 20 times trailing free cash flow, as well. Both of these valuations seem rather "optimistic," given that few analysts believe Allison can grow its profits faster than 15% per year over the next five years. Indeed, even with a modest dividend yield of 2%, it's hard to argue that Allison shares are even fairly valued at today's prices -- much less a "bargain."

Moral of the story: When the smart money is rushing to get out of a stock, don't crowd the exit door, rushing to get in.

Looking for a better play in the automotive sector? China is already the world's largest auto market -- and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market," names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.

Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2587219, ~/Articles/ArticleHandler.aspx, 10/1/2016 5:10:39 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 7 hours ago Sponsored by:
DOW 18,308.15 164.70 0.91%
S&P 500 2,168.27 17.14 0.80%
NASD 5,312.00 42.85 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 4:02 PM
ALSN $28.68 Up +0.64 +2.28%
Allison Transmissi… CAPS Rating: ***
OCX $84.49 Up +0.50 +0.60%