Deutsche Downshifts Allison Transmission Rating To Sell

Shares of Allison Transmission Holdings Inc ALSN fell 3 percent Tuesday morning after analysts at Deutsche Bank turned sour on the stock. The firm's Nicole DeBlase downgraded Allison Transmission's stock rating from Hold to Sell with a price target slashed from $43 to $33 as the company's short-term headwinds are too notable to ignore.

Allison Transmission has been one of the strongest performers in the Machinery group with an organic revenue growth rate of more than 15 percent, DeBlase noted. But the strong performance is due to two areas of strength that are likely to be unsustainable next year: O&G parts/OE and NAFTA Class 8 straight/MD truck.

As such, Allison Transmission should see a 7-percent year-over-year decline in its total parts business next year and a 1-percent year-over-year EBITDA growth rate in 2018 through 2019, which now implies significant underperformance versus its peers.

Meanwhile, the electrification of medium-duty trucks isn't going to happen in the near term and represents a "significant structural risk" over the next 10 years, which adds another reason to be wary of Allison Transmission's multiple, the analyst added.

"We project 15% medium-duty adoption (as a % of production) by 2027, representing ~36% of total company EBIT that could move towards zero over time in a bear case (since electric powertrains do not require sophisticated transmission technology, only a basic gearbox)," DeBlase explained. "Our DCF suggests potential downside to $30/sh should this play out, but the value declines each year into perpetuity."

Bottom line, Allison Transmission's stock isn't expensive by any metric but the uncertainty over the outlook of technology changes for the trucking industry takes precedence.

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