• Wondering if Allison Transmission Holdings at around US$127 per share is still good value, or if most of the easy upside is already behind it.
• The stock has seen a 2% decline over the last 7 days, but is up 8.8% over 30 days, 28.7% year to date, 32.7% over 1 year and more than 7x over 5 years. This naturally raises questions about what is now priced in.
• Recent coverage has focused on Allison Transmission Holdings as a long term compounder for investors who held through the last several years. Many readers are asking whether the current level still lines up with fundamentals. At the same time, evergreen interest around the stock has prompted closer attention to how it is valued using more than one method.
• Simply Wall St currently gives Allison Transmission Holdings a value score of 5 out of 6. The rest of this article will walk through the key valuation approaches used to reach that score, before finishing with a framework that can help you think about valuation in an even more rounded way.

Approach 1: Allison Transmission Holdings Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model takes estimates of a company’s future cash flows and discounts them back to today’s dollars to arrive at an implied value per share.

For Allison Transmission Holdings, the model uses a 2 Stage Free Cash Flow to Equity approach based on cash flow projections in $. The latest twelve month free cash flow is $692.2 million. Analysts provide explicit estimates out to 2030, with projected free cash flow of $1,220.0 million in that year. Beyond that, Simply Wall St extrapolates cash flows using modest growth rates to complete the 10 year path.

After discounting all those projected cash flows back to today, the DCF model suggests an intrinsic value of about $220.83 per share. Compared with a current share price around $127, this implies the stock trades at a 42.3% discount to the model’s estimate of fair value. On this metric, Allison Transmission Holdings appears to be trading below the model’s estimate of fair value.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Allison Transmission Holdings is undervalued by 42.3%. Track this in your watchlist or portfolio, or discover 51 more high quality undervalued stocks.

Approach 2: Allison Transmission Holdings Price vs Earnings

For profitable companies, the P/E ratio is a useful shorthand that links what you pay for the stock to the earnings it currently produces. It helps you see how many dollars the market is willing to pay for each dollar of profit.

What counts as a “normal” P/E depends on how fast earnings are expected to grow and how risky those earnings are. Higher growth and lower perceived risk can support a higher P/E, while slower growth or higher risk usually point to a lower one.

Allison Transmission Holdings currently trades on a P/E of 17.0x, compared with the Machinery industry average of about 27.4x and a peer group average of 32.0x. Simply Wall St’s Fair Ratio for the stock is 26.24x. This Fair Ratio is a proprietary estimate of what the P/E could look like given factors such as earnings growth, industry, profit margins, market cap and risk profile.

Because the Fair Ratio builds in these company specific drivers, it can be more informative than a simple comparison with peers or the broad industry. With the current P/E of 17.0x below the Fair Ratio of 26.24x, the multiple based view points to the stock trading below that Fair Ratio estimate.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Allison Transmission Holdings Narrative

Earlier it was mentioned that there is an even better way to think about valuation. On Simply Wall St that shows up as Narratives, which let you pair your own story about Allison Transmission Holdings with specific assumptions for future revenue, earnings, margins and a Fair Value. You can then compare that Fair Value to today’s price, see how it shifts in real time when fresh news or earnings are released, and explore how different investors in the Community page frame the same stock, whether that is a more optimistic view closer to US$174.73 or a cautious one nearer to US$84, so you can decide which version of the story you find most reasonable.

For Allison Transmission Holdings however we will make it really easy for you with previews of two leading Allison Transmission Holdings Narratives:

Fair value in this bullish analyst consensus narrative: US$131.00 per share

Implied undervaluation versus the recent US$127.37 price: about 2.8% below that narrative fair value

Analyst modeled revenue growth: 28.82% a year

• Analysts link the current setup to cost actions, the Dana Off Highway acquisition and expanding off highway and defense exposure, with earnings projections out to 2029 tied to these themes.
• The narrative builds in strong revenue growth, some margin compression and ongoing share count reduction, then applies a lower future P/E than the broader Machinery industry to reach the US$131.00 fair value.
• Key uncertainties center on execution of the Dana integration, how on highway demand develops, and whether electrification and regulatory change shift the profit mix faster or slower than analysts expect.

Fair value in this bearish analyst narrative: US$92.00 per share

Implied overvaluation versus the recent US$127.37 price: about 38.5% above that narrative fair value

Analyst modeled revenue growth: 26.19% a year

• This narrative leans on the lowest analyst fair value, stressing dependence on internal combustion transmissions, gradual electrification exposure and the risk that demand for legacy products trends lower over time.
• It assumes a lower earnings multiple and builds in concerns around customer concentration, truck demand, execution on acquisitions and pricing, which together keep the fair value well below the current share price.
• The bear case could be undermined if electrified products, defense contracts and aftermarket services contribute more sustained growth and resilience than these assumptions allow for.

If you want to see how other investors are weighing these bullish and bearish setups, and how that ties back to valuation assumptions and fair value ranges, See what the community is saying about Allison Transmission Holdings.

Do you think there's more to the story for Allison Transmission Holdings? Head over to our Community to see what others are saying!

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.