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Why Is Allison Transmission (ALSN) Up 14.4% Since Last Earnings Report?

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A month has gone by since the last earnings report for Allison Transmission (ALSN - Free Report) . Shares have added about 14.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Allison Transmission due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Allison's Q3 Earnings & Sales Top Estimates, Down Y/Y

Allison reported third-quarter 2020 earnings of 68 cents per share, beating the Zacks Consensus Estimate of 46 cents.

It delivered better-than-anticipated results on stellar revenues from the North America On-Highway, Defense, Outside North America On-Highway and Service Parts, Support Equipment & Other end markets.

The bottom line, however, is lower than the year-ago quarter’s earnings of $1.23 per share.

Net income for the reported quarter came in at $77 million compared with the $149 million recorded in the year-ago quarter. This downside primarily resulted from lower net sales and higher selling, general and administrative (SG&A) expenses, partially offset by reduced manufacturing expense, price inflation of certain products and the intra-year timing of product initiatives spending.

During the September-end quarter, net sales slid 20% year on year to $532 million. The figure, nevertheless, surpassed the Zacks Consensus Estimate of $456 million. Gross profit declined 27% year over year to $254 million. Gross margin was 47.7% compared with the prior-year quarter’s 52%. This decrease in gross profit chiefly stemmed from lower net sales, partially muted by lower manufacturing expense corresponding to decreased net sales, price hike on few products and reduced incentive-compensation expense.

Segmental Performance

Allison segregates its revenues by the end markets served, which are as follows:

For the reported quarter, net sales in the North America On-Highway end market dipped 24% year over year to $281 million on dwindling demand for Rugged Duty series and Highway series models. The sales figure, however, outpaced the Zacks Consensus Estimate of $218 million.

For the July-September period, net sales in the North America Off-Highway end market tanked 83% year over year to $1 million. Waning demand for hydraulic fracturing applications resulted in this decline. Moreover, the sales figure missed the Zacks Consensus Estimate of $1.5 million.

For the third quarter, net sales in the Defense end market jumped 40% year over year to $56 million on higher tracked vehicle demand. The figure also beat the Zacks Consensus Estimate of $46 million.

The Outside North America On-Highway end market’s net sales fell 28% year on year to $71 million during the September-end quarter on soft global demand amid the pandemic. The figure, however, beat the Zacks Consensus Estimate of $59 million.

Net sales in the Outside North America Off-Highway end market slumped 83% year on year to $4 million during the third quarter, due to dismal demand in the energy, mining and construction sectors. In addition, the reported figure lagged the Zacks Consensus Estimate of $17.4 million.

Net sales in the Service Parts, Support Equipment & Other end market declined 9% year on year to $119 million in the reported quarter, due to shrinking demand for North America service parts and support equipment. The figure, however, topped the Zacks Consensus Estimate of $111 million.

Financial Position & Dividend

Allison had cash and cash equivalents of $251 million as of Sep 30, 2020, compared with $192 million as of Dec 31, 2019. As of Sep 30, 2020, long-term debt was $2,510 million, as compared to $2,512 million as of Dec 31, 2019.

During September-end quarter, the company’s net cash provided by operating activities was $158 million compared with the year-ago quarter’s $212 million. Adjusted free cash flow in the reported quarter was $136 million, down from the prior-year quarter’s $165 million.

During the third quarter, the company settled $16 million in share repurchases and paid a dividend of 17 cents per share.

2020 Outlook

Allison projects net sales for 2020 in the range of $2,025-$2,075 million, net income in the $285-$315 million band, adjusted EBITDA of $690-$730 million, net cash provided by operating activities at $490-$520 million, adjusted free cash flow between $385 million and $425 million, and capital expenditures between $107 million and $117 million.

The full-year net sales guidance reflects lackluster demand across all end markets except for the Defense end market as a result of the coronavirus pandemic, partially negated by price inflation of certain products.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 6.63% due to these changes.

VGM Scores

At this time, Allison Transmission has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Allison Transmission has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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