Index inclusion puts fresh attention on Allison Transmission

Allison Transmission Holdings (ALSN) drew fresh attention after reports it will join the S&P MidCap 400, replacing Goodyear Tire & Rubber, with the change set to take effect before trading on July 6.

For context, Allison Transmission’s share price has risen 17.62% year to date to US$116.37, and the 1 year total shareholder return of 20.19% alongside a 3 year total shareholder return of 113.01% points to momentum that has been building over a multi year period despite some recent short term pullbacks.

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With Allison Transmission now in the S&P MidCap 400 and trading at a reported intrinsic discount of about 47%, plus a gap to analyst targets near US$137, the key question is whether there is still a buying opportunity or if the market is already pricing in future growth.

Most Popular Narrative: 14.7% Undervalued

The most followed narrative on Allison Transmission puts fair value at $136.50, above the last close of $116.37, and builds its case on detailed revenue, margin and cash flow assumptions.

The recently announced acquisition of Dana's Off-Highway business materially expands Allison's global footprint, diversifies its end markets to include agriculture and construction, and is expected to drive significant operational and cost synergies ($120 million annual run rate), supporting both revenue growth and margin enhancement over the next 4 years.

Read the complete narrative. Read the complete narrative.

Want to understand why this narrative still sees upside even after a strong multi year share price run? The core thesis leans on faster top line growth, firmer margins and a future earnings multiple that sits below a key industry benchmark. Curious how those pieces fit together into a $136.50 fair value and a double digit discount at $116.37? The full narrative lays out each assumption and how they stack up against Allison Transmission's current starting point.

Result: Fair Value of $136.50 (UNDERVALUED)

However, Allison Transmission's story could shift if North America on highway demand stays weak, or if integration of the Dana Off Highway acquisition delivers less benefit than expected.

Next Steps

The mix of enthusiasm and caution around Allison Transmission makes this a good time to move quickly, review the data for yourself, and weigh the upside against the risks and rewards highlighted in the 3 key rewards and 2 important warning signs.

Looking for more investment ideas beyond Allison Transmission?

If Allison Transmission has your attention, do not stop there. Broadening your watchlist across sectors and styles can help you spot opportunities others overlook.

• Scan for potential bargains with strong fundamentals by reviewing the 44 high quality undervalued stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.