Research and Valuation is a very time-intensive process. Although, I believe I can do thorough research on a business, but I have struggled with identifying a filtered list of names that I should be spending time on. Initially, I had a fixed criteria of financial metrics but overtime I have become more flexible. Moreover, having decent research skills does not necessarily equate to rational investing behavior – and I have made quite a few mistakes in my investing journey, which I never tried to define or document on paper until recently when I chanced upon the “Dealing with Mistakes” insights of the Deep Research Fund based in Switzerland . Not only those insights, but also what deeply resonated with me is the Deep Research process. I read the Screening, Pre-Check, In-Depth Research and Investment Decision processes multiple times because it gave me a sense of enlightenment and awakening. Had I used the “challenger process” – described as key to the Investment Decision process, I might have made less mistakes or probably would have acted less hasty (at times, when I spend so much time and effort on a business, I am tempted to think favorably and inclined to invest).
Moving forward, these process steps would be close to my heart, and I have sworn to adopt them in my research and investing journey.
Since my portfolio has become skewed toward Indian equities of late, I was looking to research global companies. I wanted to thank the Deep Research Fund for indirectly helping me with a filtered list of names to research. From their top 10 holdings – that are published in the public domain – I have researched and valued Allison Transmission
I have a framework that I use to do thorough research on a business.
I have described the framework through examples in quite a few of my equity research videos on my channel. I am linking two of my latest here: research of Hariom Pipe, an Indian structural steel pipe and tube maker and Ganesha Ecoshpere, a PET bottle recycler.
Now, I will present the outcomes of my research and valuation of Allison Transmission, which is the largest manufacturer of Automatic Transmissions (AT) for commercial vehicles
** Due to paucity of time, I have not made a video on this research yet **
** Please note that I have skipped mentioning a few key details in the blog (e.g., Financial Ratios Analysis and Management Quality Assessment) again due to paucity of time. These are key steps in research and I have covered them for companies linked above **
What are transmissions?
Transmissions in commercial vehicles are a crucial part of the drivetrain, the system that transfers power from the engine to the wheels.
Fully Automatic Transmissions (AT) are predominantly used in medium-duty commercial vehicles, which are primarily used for vocational, stop-and-go applications.
This includes On-highway and Off-highway:
On-highway
- Urban Delivery and Logistics
- Fire and Emergency
- Refuse
- School, Transit, Shuttle and Coach Bus
- Day Cab Tractors
- Utility
- Motorhome
Off-highway
- Construction
- Agriculture
- Mining
- Hydraulic Fracturing
- Oilfield Service and Support
- Specialty
Type of Transmissions
Automated Manual Transmissions (AMT) are taking a significant share of the long-haul, heavy-duty commercial vehicle market away from Manual Transmissions (MT).
AMTs are a better fit for the long-haul market, where fuel efficiency is the top priority and gear changes are infrequent, they are not ideal for the high-cycle, demanding work of medium-duty vocational CVs.
For medium-duty vocational trucking, Automatic Transmission are a superior choice due to durability, lower maintenance, and driver comfort.
Total Addressable Market (TAM)
Allison Transmission derives 70% of its revenue from on-highway end markets – a bulk of it from North America, in which it has a market share of 77% in medium-duty.
There is a significant opportunity in the international on-highway market with ~25%* of addressable medium-duty commercial vehicles penetrated currently with automatic transmission.
* A lot of research says that only 5% of international on-highway CV market is penetrated. This CV market includes both medium and heavy-duty. However, Allision’s AT best fit segment is medium-duty (incl. buses), hence I have attempted to estimate the industry medium-duty penetration only. Please bear in mind that actual numbers are hard to come by, hence treat these numbers as directional.
There is an attractive opportunity in the off-highway end-market as well.
** Please note that I have estimated the future TAM for on-highway medium-duty CV for NA and international markets. I have explained my assumptions in the VALUATION section and linked my valuation model as well.
I have not sized the future TAM for off-highway and defense, but used a simplistic assumption instead **
Allision is focusing on better access to international markets and increasing the off-highway business through the DANA off-highway acquisition and focusing on growing the Defense pie.
DANA of acquisition – expected to close by end of 2025 Q4 – will give Allision access to international markets where DANA derives 70% of its $2.4B revenue
Headwind
Let’s address the elephant in the room: Transition to Electric Vehicles
Transition to EV will result in internal combustion engines and transmissions becoming obsolete.
Allison has developed electric drivetrains to transition away from automatic transmissions.
Important questions to consider:
- How long will it to take for medium-duty commercial vehicles to electrify ?
- More importantly, will Allison be able to attain dominance in electric drivetrains (like they do in automatic transmissions) amidst increasing competition?
- Will Allison have similar healthy margins (35% EBITDA) and return ratios?
I will try addressing 2 and 3 in the subsequent sections
Competition
AMT makers ZF and Eaton, and heavy-duty axle maker Meritor are making headway into electric powertrain for medium-duty.
My attempt to deep dive into the technological differences of Allison’s electric products vs competitors – as per commentary from industry experts – reveals that although, Allision has a competitive technology edge right now, other players are working to close the gap both in terms of technology incl. control software around integration with multiple platforms and in tie-ups with OEMs
Although Allison’s ticket size per EV is higher than AT in ICE vehicles, however as per industry experts, electrification doesn’t require much aftersales support – which is a high margin business for Allison – since product warranty will take care of it for the most part.
Although Allison will likely be able to retain / attain a reasonable share in the EV pivot, it may not enjoy the same margins as they do today.
Moat Assessment
“A truly great business must have an enduring moat that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business castle that is earning high returns” – Warren Buffett
There is no one formula to measure business moats.
The all-encompassing metric that comes closest is ROIC (or ROE for financial services) – a business which can demonstrate high ROIC for a significant period is able to do so because it has moat.
Despite ticking most of the boxes, Allision is a medium moated business due to risk of losing share and possibility of declining margins with the eventual transition to EV – resulting in lower likelihood of generating excess returns for a prolonged period.
Valuation
3-statement modeling DCF Valuation
In all my assumptions and estimates, I believe I have erred on the side of conservatism since it’s my money on the line and I want conservative assumptions to eventually drive my investing decision.
I am linking my valuation model if it helps
Key Growth Assumptions
As a result, revenue increases from $5.3 B (incl. Dana off-highway business) in 2026 to $7B by 2035 and further to $7.6B by 2040.
Key Margin Assumption
Key Capital Assumptions
DCF Valuation model outcomes:
- As per my underlying assumptions, ROIC (pre-tax) falls to 14-15% following the acquisition, gradually rises to 21% by 2030 and then largely remains stable at 20% over the next 10-15 years*
- The excess returns generated – due to the medium moated nature of the business – results in a fair Enterprise Valuation of 12x LTM EBITDA, which translates to a fair Equity Value of $9.8B i.e., an undervaluation of 30%+
Return computation using EV / EBITDA multiple:
- I invest for the long-term and view investing as owning a small slice of the business (although, my slice is very small).
- Over the long-term this could be a very good business to own. However, for investors with a shorter horizon say 5 years, a potential re-rating + compounding + dividend yield could fetch decent returns to the tune of 14-15% CAGR over this time frame – this is not an investment advice | only for Education.
Please note that my valuation takes a bunch of assumptions and a key one being the successful acquisition of Dana-off highway business.
I am linking my valuation model if it helps
* I valued this business both using 10y and 15y timeframe. My fair valuation in both cases is in a close ballpark.
Investment Thesis and Risks
Investment Thesis
- Market leadership in Automatic Transmissions for on-highway medium-duty CV
- Increasing penetration in other end-markets – off highway, defense – with lower presence
- Significant opportunity in the underserved international market
- Actively future-proofing for the eventual transition to EV
- Industry leading margins
- Comfortable debt position (should be able to pare down significant portion of debt over the next 4-5 years)
- Very attractive valuation
Risks
- Increasing competition – attempting to close the technological gap, OEM partnerships and market penetration
- Existential threat to legacy business
- Risk of being unable to attain/retain a dominant share and possibility of declining margins with the eventual transition to EV
- Dana off-business acquisition falling apart
Hope you enjoyed reading this blog. Please reach out me at gautamrastogi.investandrise@gmail.com for any questions.
Disclosure: I’d be investing in this company
Invest (in yourself) and Rise!
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