Allison Transmission Holdings (NYSE:ALSN): A Strong Value Pick with Undervalued Fundamentals

Investors looking for undervalued stocks with strong fundamentals might consider Allison Transmission Holdings (NYSE:ALSN). The company was selected through a "Decent Value" screening method, focusing on stocks with good valuation metrics (scoring 7 or higher on ChartMill's Valuation Rating) while also showing reasonable performance in profitability, financial health, and growth. This approach fits value investing principles, where investors target stocks priced below their true worth but supported by solid business fundamentals.

Key Strengths of Allison Transmission

1. Attractive Valuation (Rating: 8/10)

Allison Transmission’s valuation metrics indicate the stock may be priced lower than its peers and the broader market:

• Price/Earnings (P/E) Ratio of 10.18 – This is much lower than the industry average (62.63) and the S&P 500’s P/E of 27.35, suggesting the stock could be undervalued.
• Price/Forward Earnings of 8.74 – The forward P/E is even more appealing, ranking lower than 96.85% of industry competitors.
• Enterprise Value/EBITDA and Price/Free Cash Flow – Both ratios support the stock’s undervaluation, with ALSN priced more favorably than over 80% of its peers.

For value investors, these metrics imply the market may not fully recognize Allison Transmission’s earnings potential, offering a chance for long-term gains.

2. Strong Profitability (Rating: 9/10)

Profitability is key in value investing, as it confirms the company can maintain and increase its true worth. Allison Transmission performs well here:

• Return on Equity (ROE) of 45.29% – This beats 96% of industry peers, showing efficient use of capital.
• Operating Margin of 31.45% – One of the best in the sector, reflecting strong pricing power and cost control.
• Consistent Earnings & Cash Flow – The company has stayed profitable and generated positive operating cash flow over the past five years, a sign of financial stability.

High profitability lowers the risk of value traps, as it indicates the stock’s low price isn’t due to poor business performance.

3. Solid Financial Health (Rating: 6/10)

While not perfect, Allison Transmission’s financial health is stable enough to sustain its operations:

• Strong Liquidity – A Current Ratio of 3.05 and Quick Ratio of 2.37 show sufficient short-term solvency.
• Manageable Debt – Though the Debt/Equity ratio (1.44) is higher, the company’s Debt-to-Free Cash Flow ratio (3.69) suggests it can handle its obligations.
• Share Buybacks – The company has decreased its share count over the past five years, indicating confidence in its financial standing.

A moderate health rating means investors should watch leverage, but the company’s cash flow generation reduces major solvency concerns.

4. Moderate Growth (Rating: 4/10)

Growth is less critical in value investing, but steady expansion supports long-term potential:

• Historical EPS Growth (11.10% annualized) – Earnings have grown consistently, though recent growth (15.35% YoY) is slowing to an expected 6.32% annually.
• Revenue Stability – Sales growth has been modest (3.86% YoY), but consistency lowers cyclical risks.

While not a high-growth stock, Allison Transmission’s stable performance aligns with value investing’s emphasis on sustainable, not speculative, returns.

Why This Matters for Value Investors

Value investing relies on finding stocks where the market price doesn’t match the business’s true quality. Allison Transmission’s low valuation multiples, combined with high profitability and reasonable financial health, suggest it may be undervalued. The company’s strong margins and return metrics show it can grow value over time, while its moderate growth means it doesn’t depend on unrealistic future expectations.

For a closer look at Allison Transmission’s fundamentals, check the full Fundamental Analysis Report.

Find More Undervalued Stocks

Allison Transmission was picked using a structured screening process. Investors looking for similar opportunities can use the "Decent Value" screen here to discover other stocks with good valuations and strong fundamentals.

Disclaimer: This article is not investment advice. Always do your own research or consult a financial advisor before making investment decisions.