John Heldman and David Hutchison of Triad Investment Management presented their in-depth investment thesis on Allison Transmission (NYSE: ALSN) at Best Ideas 2018.
Allison is the world’s largest manufacturer of fully-automatic transmissions for medium and heavy-duty commercial vehicles (primarily Class 6,7 & 8) including on-highway, off-highway, buses, motorhomes, and defense vehicles. Allison has 60% global market share of the on-highway (~2/3 of revenue) fully-automatic transmission market. Founded in 1915, bought by General Motors in 1929, sold by GM in 2007 to Carlyle Group to shore up a weak balance sheet, ALSN went public in 2012. Fully-automatics are most cost-effective and primarily used in metro markets where many stops and starts are performed. Benefits of fully-automatics include fuel savings, higher vehicle productivity, lower lifecycle costs, easier driving training and retention, and driver comfort. With current and anticipated driver shortages and rising driver pay, ALSN customers will have incentives to retain drivers however possible. ALSN enjoys favorable characteristics such as brand name recognition, technological leadership, high switching costs, a large installed base, diversified end markets by truck type and geography, longstanding OEM customer relationships, strong profitability and FCF, and capable management with excellent capital allocation. Allison possesses good long-term organic growth opportunities, including hybrid, electric, alternative fuels and emission-reducing technologies. In addition, a large opportunity exists in international markets, particularly emerging economies where fully-automatic transmissions have low market share. ALSN recently traded at ~10x John and Dave’s 2018 EBITDA estimate. They believe the company can grow revenue and EBITDA at a high single-digit rate over the next three to five years, which combined with smart deployment of FCF could lead to the share price doubling over that time frame.
About the instructors:
John Heldman brings over 30 years of experience to the management of investment portfolios. Prior to founding Triad, he was a Senior Vice President and Portfolio Manager with Neuberger Berman. John has also managed institutional and individual investment portfolios for Deutsche Bank, Scudder Investments and Bank of America, including managing equity funds and serving on the Equity Strategy Committee. He obtained his Bachelor of Science degree in Finance and Master of Business Administration from California State University, Long Beach. John is a CFA charterholder, and a member of CFA Institute and CFA Society Orange County.
Dave Hutchison has 23 years of experience in investment management. Prior to joining Triad, he served as Investment Strategist for Chamberlain Group, directing investment manager research. Dave also founded and managed Hutchison Capital, a registered investment advisor. He holds a Bachelor’s degree in Political Science from Macalester College and a Master of Business Administration from the University of Southern California’s Marshall School of Business. Dave is a CFA charterholder, and a member of CFA Institute and CFA Society Orange County.
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