Our new recommendation is a bus/heavy duty truck transmission company that has a current annual dividend yield of 1.95%, paid quarterly. We are also selling three previous ideas.
Buy: Allison Transmission Holdings, Inc. (ALSN)
From Cabot Undervalued Stocks Advisor
Allison Transmission Holdings, Inc. is a midcap ($6.4 billion market cap) manufacturer of vehicle transmissions with about $2.7 billion in revenues. About 76% of sales are produced in North America. Many investors reflexively dismiss this company, viewing it as a low-margin producer of car and light truck transmissions that is destined for obscurity in an electric vehicle world. However, this view would be incorrect. Allison produces no car and light truck transmissions. Instead, it focuses on the school bus and Class 6-8 heavy-duty truck categories, where it holds an 80% market share. Its 35% EBITDA margin is sharply higher than its competitors and on-par with many specialty manufacturers. And it is a leading producer and innovator in electric axles which all electric trucks will require. Another indicator of its advanced capabilities: Allison was selected to help design the U.S. Army’s next-generation electric-powered vehicle.
The company generates considerable free cash flow, which has helped it maintain a low-debt balance sheet. Its capable leadership team keeps its shareholders in mind, as the company has reduced its share count by 38% in the past five years. The shares were highlighted in our latest Cabot Turnaround Letter as a “like watching paint dry” stock, and as it fit our 13F criteria, as noted value investment firm Polaris Capital Management recently took a sizeable position (1.5% stake) in the company. Allison shares offer an attractive dividend yield.
Valuation at 6.8x estimated 2022 EBITDA is below the company’s historical average and undervalues its franchise and financial strength. We are putting a 48 price target on ALSN shares. From a tactical perspective, investors may want to establish a starter position here, then add if the shares exhibit significant weakness. BUY
Bruce Kaser, Cabot Undervalued Stocks Advisor, cabotwealth.com, 978-745-5532, February 23, 2022
Sell: AGNC Investment Corp. (AGNC), KKR & Co. Inc. (KKR), and Spectrum Brands Holdings, Inc. (SPB)
From Cabot Dividend Investor
Updated from WSBD 841, May 20, 2021, WSBD 840, April 15, 2021, and WSBD 845, September 9, 2021
This is a different market. It’s not 2020 or 2021. It’s 2022. There are different rules for this leg of the market than there have been over the past couple of years. It is a less forgiving market, where underperforming stocks are more treacherous. That’s why this portfolio recently sold positions in AGNC Investment Corp (AGNC), KKR & Co. (KKR), and Spectrum Brands Holdings (SPB).
Tom Hutchinson, Cabot Dividend Investor, cabotwealth.com, 978-745-5532, February 23, 2022