Morgan Stanley: Allison Transmission At 'Vulnerable Point'

Commercial duty automatic transmission maker Allison Transmission Holdings Inc ALSN is a "good company" but at a "vulnerable point in the cycle," according to Morgan Stanley.

The Analyst

Morgan Stanley's Courtney Yakavonis initiated coverage of Allison Transmission with an Equal-Weight rating and $50 price target.

The Thesis

Allison Transmission is the largest maker of automatic transmissions for heavy duty and medium duty trucks and deserves credit for winning "significant" market share over the past seven years, Yakavonis wrote in the note. The company's success over the years translate to a best-in-class EBITDA margin rate of around 42% in 2018.

After multiple years of expansion, however, there are now signs that the favorable cycle is showing signs of slowing down.

Specifically, orders in the key North American On Highway markets have fallen by more than 30% year-over-year over the past three months. This segment alone accounts for around 50% of total company-wide sales, which implies the potential for fiscal 2020 sales to fall by 5%; This is 200 basis points worse than the Street is modeling.

The research firm said it will monitor closely North American order data and if signs of improvement start to appear then a more constructive stance on the stock may be warranted, the analyst wrote.

Price Action

Shares of Allison Transmission were trading lower by 1.13% at $47.07 Wednesday morning.

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