Thursday's looking bleak for investors in truck transmission manufacturer Allison Transmission Holdings (ALSN 3.17%) stock, down 5.2% through 11:25 a.m. ET despite beating on earnings last night.
Heading into its third-quarter 2023 report, analysts had forecast that Allison would earn only $1.72 per share, but Allison actually earned $1.76 per share. That's the good news. The bad news is that Allison was also supposed to do $758.3 million in revenue last quarter, but it only did $736 million -- hence, an earnings beat paired with a sales miss.
NYSE: ALSN
Key Data Points
Allison sales and earnings
And yet, overall, the news wasn't half bad. While Allison missed on sales, it still grew its sales 4% year over year -- and net income was up 14%, or even 21% per share after stock buybacks.
That's pretty impressive earnings performance on low-single-digit sales growth.
As CEO David Graziosi explained, the earnings beat began with "cost mitigation" and "price realization" (lowering input costs, and raising prices) that boosted Allison's gross profit margin by 230 basis points year over year. Even with selling, general, and administrative expenses rising faster than sales, therefore (up 10% year over year), this left Allison with a powerful 30.2% operating profit margin (up 160 basis points year over year), and a net profit margin of 21.5% -- very impressive indeed for an industrial concern.
Should you buy Allison Transmission stock?
Turning to guidance, Allison held firm on its promise to deliver about $3 billion in sales through the end of this year, and about $600 million in net income -- a smaller but still impressive 20% net profit margin. That should work out to about $6.70 per share, or 21% better than Allison earned in 2022.
Admittedly, that's a bit less than the $7 that Wall Street is predicting. Free cash flow won't even be as strong as net income -- about $570 million through the end of this year. But even so, and even factoring Allison's $2 billion net debt load into the picture, I get an enterprise valuation of only 12.5 times current-year free cash flow for Allison.
With a 1.5% dividend yield and earnings growing 20% this year, that seems like a good deal to me.
