Allison Transmission is the IBD Stock Of The Day as it trades tightly amid the stock market correction after strong earnings and higher guidance. Allison stock dipped near a buy point Thursday.
The Indianapolis-based maker of vehicle transmissions and other drivetrain components is maneuvering to embrace the global shift to electrical-vehicle technologies. Through its 2019 acquisitions of Michigan-based AxleTech International and London-based Vantage Power, it is helping to electrify bus fleets and expand its EV-related offerings.
Nikola, an electric-truck startup, is a partner. The auto parts maker was formerly part of General Motors. In 2007, GM sold the unit for $5.6 billion to a private group led by Carlyle Group. Allison came public in a 2012 public offering. Its current market capitalization is $5.27 billion.
Allison Stock Eyes Breakout
Shares of Allison Transmission edged down 0.3% to 59.10 in Thursday's stock market action. Allison stock has been trading tightly and has formed a four-weeks-tight pattern with a 60.17 buy point, the IBD MarketSmith weekly chart shows. It's just about 2% below the entry.
The tight trading is a sign of resilience against the broader market correction. The chart pattern could mature into a flat base in another week or so.
Notably, ALSN stock continues to hold above the 50-day moving average. It's pulling back near that line for the first time since a June 2 breakout past a 49.95 cup-with-handle entry. It has been riding its 21-day exponential moving average higher for much of that time.
The relative strength line is at its highest level in years, a positive sign. The RS line measures a stock's price performance vs. the S&P 500. It is the blue line shown on every IBD chart.
On July 28, shares hit a 52-week high following a beat-and-raise Q2 earnings report. Year to date, Allison stock is up more nearly 42%. It had struggled for much of 2022.
ALSN stock earns an IBD Composite Rating of 97 out of a best-possible 99. Its RS Rating of 94 means it has outperformed 97% of all stocks in IBD's database over the past year.
With the stock market in a correction, investors should avoid making new purchases.
In this climate, investors should be building watchlists of top stocks holding up and stocks with strong relative strength lines. Allison fits the bill.
Allison Earnings Acceleration
On July 28, the company beat earnings and revenue estimates for the second quarter. Allison also raised full-year revenue guidance above consensus.
Year over year, earnings per share increased 52%, driven by higher net income and lower shares outstanding, the company said. Sales rose 18% in the quarter.
Allison stock shows two quarters of accelerating earnings growth. Cash and equivalents stood at $351 million at the end of the June quarter. Long-term debt was $2.5 billion; the IBD Stock Checkup shows a debt-to-equity ratio of 286%.
For the full year, analysts now expect earnings to increase 27% and revenue to grow 10%. Both would be down slightly from the prior two years. A further, sharper slowdown is seen in 2024.
Four analysts hiked price targets on Allison stock after its Q2 report, FactSet shows.
But Wall Street is generally on the sidelines, with an average rating on ALSN stock of hold.
EV Shift
Allison Transmission is one of the largest global manufacturers of medium- and heavy-duty fully automatic transmissions for commercial and defense vehicles.
The company is tracking the global shift to electric vehicles. Its products include electrified propulsion systems and transmissions. For now, the bulk of revenue comes from traditional vehicles.
Peers like Cummins are also embracing the EV transition with new products.
Last year, engine maker Cummins said it will purchase Meritor, which specializes in brake and axle technology, including electric axles.
