The stock of Allison Transmission Holdings (NYSE:ALSN, 30-year Financials) is believed to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $42 per share and the market cap of $4.6 billion, Allison Transmission Holdings stock gives every indication of being fairly valued. GF Value for Allison Transmission Holdings is shown in the chart below.
Because Allison Transmission Holdings is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 6.6% over the past five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Allison Transmission Holdings has a cash-to-debt ratio of 0.12, which is worse than 85% of the companies in Vehicles & Parts industry. GuruFocus ranks the overall financial strength of Allison Transmission Holdings at 4 out of 10, which indicates that the financial strength of Allison Transmission Holdings is poor. This is the debt and cash of Allison Transmission Holdings over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Allison Transmission Holdings has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2 billion and earnings of $2.48 a share. Its operating margin is 24.56%, which ranks better than 98% of the companies in Vehicles & Parts industry. Overall, the profitability of Allison Transmission Holdings is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Allison Transmission Holdings over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Allison Transmission Holdings’s 3-year average revenue growth rate is better than 76% of the companies in Vehicles & Parts industry. Allison Transmission Holdings’s 3-year average EBITDA growth rate is 3.7%, which ranks in the middle range of the companies in Vehicles & Parts industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Allison Transmission Holdings’s ROIC is 9.64 while its WACC came in at 6.95. The historical ROIC vs WACC comparison of Allison Transmission Holdings is shown below:
To conclude, The stock of Allison Transmission Holdings (NYSE:ALSN, 30-year Financials) is believed to be fairly valued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Vehicles & Parts industry. To learn more about Allison Transmission Holdings stock, you can check out its 30-year Financials here.
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