The Institutions Begin To Shed Tightly Held Allison Transmission

Allison Transmission Moves Higher On Strong Guidance

Allison Transmission (NYSE: ALSN) is a tightly held company with institutional ownership near 99%. The other 1.1% of the stock is held by the insiders, insiders who aren’t selling, so there are few shares simply floating around waiting to be bought. What this means for the market-at-large is upward pressure for share prices, an enticement to sell if you will, and that bait is now being taken by those aforementioned institutions. While the net of institutional activity was roughly balanced in 2021 it was biased in favor of the bears and selling activity has picked up noticeably in 2022. Institutional selling in the first 6 weeks of the year is a net $214 million and equal to 5% of the market cap. If this trend continues it could produce a headwind for share prices and cap gains in this high-quality stock. 

Allison Transmission Is In High Gear 

Shares of Allison Transmission are moving higher in pre-market trading because the company not only beat the consensus estimates but it blew right past them and guided the coming year above expectations. The $644 million in revenue is up 20.4% versus last year and 4.3% in the two-year stack which beats the consensus by 850 basis points and confirms our own expectations for the company. The revenue was driven by strength in most end markets with only the North American On-Highway segment showing any weakness. North American On-Highway contracted low-single-digits while all other segments grew by at least 19%. The Outside North America On-Highway segment grew by 38% to lead in terms of contribution to the bottom line. 

Moving down to the income, the company reported slim but measurable increases in both gross and operating margin that helped them lever the strength in revenue. Gross margin improved by 10 basis points and SG&A 125 basis which left the GAAP EPS at $1.15. This is up 117% from last year and beat the consensus by $0.24 and the outlook is just as strong. The company is expecting revenue in the range of $2.625 billion to $2.775 billion versus the analyst consensus of $2.6% with net income growth of 17.65% at the high end of the range. Based on market strength despite pent-up manufacturing among OEMs, we think this company will outperform guidance on both the top and bottom lines. 

Allison Transmission’s 1.85% Yield Is Cheap

Allison Transmission yields 1.85% while trading at only 7X its EPS outlook which is a value anyway you look at it. Add in the positive outlook for revenue growth, earnings growth, and distribution growth and this dividend becomes even more attractive. The risk is that FCF tightened over the past year but that is mitigated by inventory increases and investment in future growth. Assuming the company is able to execute on its objectives, we see no reason why the company won’t extend its dividend streak to a 3rd and 4th consecutive annual increase. 

The Technical Outlook: Range-Bound Allison Transmission Moves Higher 

Shares of Allison Transmission have been range-bound the last three years or so and the pandemic didn’t help any. The stock is still trading near the lower end of the range, however, and looks like it will trend higher in the near to mid-term at least. There is a risk of resistance at the $41.30, $45.25, and $49 levels that may all be amplified by institutional selling. If, however, the stock can get above the $52 level, we see it advancing up to the $70 range supported by results and dividend increases. 

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About Thomas Hughes

[email protected]

Experience

Thomas Hughes has been a contributing writer for InsiderTrades.com since 2019.

Areas of Expertise

Technical analysis, the S&P 500; retail, consumer, consumer staples, dividends, high-yield, small caps, technology, economic data, oil, cryptocurrencies

Education

Associate of Arts in Culinary Technology

Past Experience

Market watcher, trader and investor for numerous websites. Founded Passive Market Intelligence LLC to provide market research insights. 

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