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Allison (ALSN) Tanks 27% Year to Date: Any Silver Lining?

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Allison Transmission’s (ALSN - Free Report) share price movement has been weak, both in absolute and relative terms. Shares of the transmission manufacturer have plunged 26.9% on a year-to-date basis, wider than the industry’s 18.7% decline.

What’s Ailing the Stock?

The coronavirus pandemic has crippled the auto industry, and resulted in sales and production decline, thereby hurting Allison, a manufacturer of fully-automatic transmissions. The pandemic has affected customers worldwide, and resulted in temporary plant closures, change in processes and a decline in production levels. The firm’s first-quarter earnings and sales declined year over year, thanks to COVID-19 woes. Allison withdrew its 2020 guidance in response to disruptions to the company’s supply chain due to the pandemic-led crisis. Weak demand for vehicles and low business confidence amid the pandemic are likely to hurt the firm's near-term sales and earnings.

Given the gloomy scenario, truck orders are plummeting, with heavy-duty truck orders down 51% and medium-duty orders down 69% in April. Weakness in Off-Highway end market due to contracting demand for hydraulic fracturing applications is likely to adversely impact the company’s bottom line in 2020. While lower demand in Europe and Asia is expected to hurt net sales in the Outside North America On-Highway end market, lower demand in the construction and mining sector is anticipated to hurt top-line growth in the Outside North America Off-Highway end market.

Contracting margins are likely to be a lingering issue. Allison has been bearing the brunt of inflating research and development costs. Such costs are expected to soar in the upcoming quarters, in turn denting margins. The company’s cash flow from operating activities is declining over the last several quarters. Weak revenue and income amid coronavirus woes are likely to further strain cash flows in the near term.

Allison’s stretched balance sheet also plays a spoilsport. As of Mar 31, 2020, long-term debt was $2,512 million, whereas cash and cash equivalents totaled $114 million, depicting financial weakness. Its total debt-to-capital ratio stands at 0.78, higher than the industry's 0.45. Elevated leverage restricts the firm’s financial flexibility to tap onto growth opportunities. Moreover, the company’s times interest earned ratio of 6.63 compares unfavorably with the industry’s 8.68.

It’s Not All Gloom

Although coronavirus has dented the firm’s near-term prospects, investors can still be encouraged by certain catalysts. Especially, Allison's diverse revenue sources provide a hedge against economic cycles and disruptions. Notably, the defense end market is partly offsetting a sluggish global demand environment. Recently, Allison clinched a roughly $162-million contract for two years to provide the U.S. Army with the X1100 cross-drive transmission. The firm is actively working with defense end-market partners to develop new cross-drive transmissions for tracked defense applications. Collaborative efforts with Caterpillar Defense on powertrain development bode well for its long-term prospects.

Allison’s strategic buyouts are expected to bolster long-term growth. Acquisitions of Walker Die and C&R Tool & Engineering have enhanced the quality of its on-highway transmissions. Allison has increased the pace of development of products that cater to electrification and fuel-cell markets for commercial vehicles. Buyouts of Vantage Power and AxleTech’s electric vehicle systems division have accelerated Allison’s electrification strategy, in turn expanding system and integration level capabilities in alternative propulsion.

While many companies have suspended dividends and stock buybacks in a bid to conserve cash, Allison intends to preserve shareholder value. To investors’ delight, the firm hiked payout by 2 cents and bought back $180 million shares during first-quarter 2020. 

Zacks Rank & Key Picks

Allison currently carries a Zacks Rank #4 (Sell)

Some better-ranked stocks in the same industry include Adient PLC (ADNT - Free Report) , Unique Fabricating Inc. (UFAB - Free Report) and Veoneer Inc. (VNE - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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