Chit Chat Stocks - Allison Transmission with Rod Alzmann (Ticker: ALSN)

Episode Date: February 9, 2023

Allison Transmission Holdings Inc. (Ticker: ALSN) is an American manufacturer of automatic transmissions and hybrid propulsion systems for commercial vehicles. The company was founded in 1915 and is headquartered in Indianapolis, Indiana. Listen as Brett and Ryan ask questions about the company, its business model, and valuation. Enjoy the show! ***************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Rod's work? Check out their Twitter here: https://twitter.com/RodAlzmann?s=20&t=tmx8adXOBhmyc2jCqCsiHw Contact us: [e-mail] Timestamps ALSN | (6:55) Bear Thesis | (22:19) Competitive Advantages | (30:25) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. My name is Ryan Henderson, and I am joined by my co-host, Brett Schaefer, as always. Today is our Thursday deep dive episode where we interview an analyst to discuss a single stock. And today we have on the show Rod Alsman to talk about Allison Transmission Holdings, probably a stock most people are not familiar with, but a pretty compelling situation. So I'm glad you guys are going to hear this one. Rod is the managing director for Wook Capital. Their philosophy or strategy is really pretty similar to the way we invest. And Rod, in particular, has got a pretty remarkable story around GameStop and kind of how they started Woot Capital that he goes through at the start of this interview.

So make sure to listen to that. Anyways, before we get to the interview, we want to talk about our presenting sponsor, which is Stratosphere. Stratosphere is our personal investing home screen for fundamental research. It's where I log in every day when I check my stocks. their dashboard tool lets us easily track all our investments. They've got a nifty news feed that you can check as well, SEC file aggregation, and they have a fundamental charting tool to compare companies. Most importantly, in my opinion, they have troves of company-specific data for tons of different businesses out there that are really hard to find anywhere else without going through a monotonous process of doing it all yourself. So they've got it all in one spot.

It's really, really easy to use. And there's plenty more that Stratosphere offers. So try it for free by going to stratosphere.io. That is stratosphere.io. You can also use promo code CCM for 15% off any paid plans. If you want to hear more about it, stick around after the episode. We've got a quick little three-minute interview with the Stratosphere founder, Braden Dennis. But without further ado, here's our interview with Rod Alsman.

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. All right, welcome in. Today we are joined by Rod Alsman. I kind of met Rod through the Twitter sphere and he is the managing director at Wook Capital. And I want to start there because it's

really, we were talking about this before the show and before we hit record. It's a very fascinating kind of genesis or kind of introduction story to managing capital. So can you explain kind of how Wook Capital got started and then what you guys do today? Yeah, definitely, Ryan. So thanks for having me on, guys. Wook Capital Management was the genesis of... John Kim is our CIO, our founder. And John and I met in 2020 through a mutual interest in GameStop. And I'd been invested in the company for several years before then. He'd become interested in it, as I'm sure many folks are aware. Michael Burry established a meaningful position in 2019 and had the view that the coming console cycle would allow

them to revamp and improve their fundamental situation. The headlines were that they're going bankrupt, yet the underlying reality didn't seem to align with that view. At points, they had five bucks in net cash and they were trading at three bucks. So there was this view that it was a you know dead dying obviously things happened uh in terms of an activist getting involved ryan cohen who who basically had a bloodless coup in jan 21 and then in the ensuing couple weeks um i had you know as i said been following it for many years with john and with a about a dozen other investors we put out a research report uh gmed.com we basically said all right, this guy's settled with the board. We've been following the company for years.

What is the next step? What do we think, you know, the bull, the bear, the base case going forward net of all this new information is. And we put out a, you know, a tongue in cheek bull case price target of $169, which was on like a 15 times EBIT multiple. We tweaked it a little bit, you know, to give Ryan Cohen's poodle a little bump to knock it up to 169 and had no idea that within a, basically within a week and a half of us publishing that research, the stock would go from $20 per share to over $400 and what clearly became one of the most incredible manias of our time. So John had been one of the largest retail shareholders. In fact, when I wrote Ryan Cohen a letter in December after their third quarter results were so bad, management just

sounded dead. So I wrote him a letter. I said to John, hey, are you on board with this? It was maybe another dozen or two other investors I've met over the years, it ended up being about 4% of shares outstanding that that letter represented that I wrote to Cohen and said, hey, if there's going to be another proxy fight, there had been a proxy fight in the prior year. If you're going to be fighting with these guys, you have our support. And within a couple of weeks of that letter, he settled with the company. So clearly 4% of shares out was helpful. And that 4% was effectively actually more when you think about the short interest, the effective vote impact of those 4% was greater because at the time, the short interest was around 100% of

the float. So it was a peculiar experience. We saw the power of crowdsourced research and John being able to exit in the 300 plus level and had a substantial amount of capital now. And he went ahead and created this private investment fund that took a few months to underway but we started the beginning of last year we had a pretty solid year all things considered we haven't yet come public with most of our positions the only one we were public about was a huge loser unfortunately but uh we were pretty opportunistic with from a trading perspective we finished the year up low double digits year to date we're up about a comparable amount so you know we're up over 20 since inception which considering our inception was right around the

all-time highs with market i'm pretty happy about but you know we're very young we're very inexperienced and this is a very new thing for us so we we're trying to be slow and steady we're trying to learn all the time and our view is that we can recreate this uh this crowdsourced research that we experienced in our gme experience uh by creating like an information network where we're sharing tools resources access to expertise and hoping to get more people involved as we go forward. So hopefully that's a decent little summary for us. Yeah, absolutely. And today we're talking about Allison Transmission Holdings, probably a company I'm guessing most people are not familiar with and doesn't quite roll off the tongue. So we're just going to call it ALSN

probably. But why don't we just start right there? What does ALSN do? And then I guess maybe it isn't that intuitive. So what are the end markets or what are the customers that they serve? yeah it's a very diverse uh group of end markets that they participate in so i'll call them allison just refer to als and the ticker i'll refer to them as allison throughout so allison makes automatic transmissions for medium and heavy duty commercial and defense vehicles so we think about your school buses think about your transit buses think about your big box trucks think about your refuse trucks think about your emergency vehicles fire trucks think about the 30 abrams tanks going into ukraine those are all propelled by allison transmissions

so it's a very diverse group of end markets they bucketize it into north america on highway outside north america on highway and then off highway and um yeah we can talk about kind of all them but but they make transmissions and every engine has a transmission now there's different types of transmissions and there's of course the overarching threat of electrification where the transmission's role changes meaningfully and that's kind of hung over the stock for several years now but we can definitely dive deeper into that as we move forward you mentioned when we were dming that you had some kind of domain expertise or experience personal experience um with allison or maybe the industry what what was that what's it been like yeah so i

I went to grad school, got an MBA in competitive strategy. While I was in school, I thought, yeah, you know, management consulting sounds really interesting. I quickly learned I was not interested in the idea of flying all over the world and country and working that many hours and being away from home that long. But I really have always been interested in strategy. Fortunately for me at University of Florida, Rider, which is ticker R, which is one of the largest transportation and logistics companies in North America, had an MBA development program that I was fortunate enough to be hired into. I started on the corporate strategy team in 2017 there. And really for almost the entirety of my time working at Rider, it was either competitive

intelligence or corporate strategy. I was exposed to the C-suite level conversations for our annual strategic planning processes. I was involved on a regular basis when we would kind of put forth different presentations to them on a quarterly competitive intelligence deep dives. So like for me, I knew nothing about trucking and logistics and transportation going into Rider, but I was afforded such an incredible opportunity over the five years there to learn so much about the industry. And by the end, by my last year there, we were, Rider was working intently on trying to size up the threat of electrification. Because if you think about Ryder's business model, they're buying and leasing and providing what they call a full-service lease of a truck,

a tractor, a trailer. And the maintenance portion is a big part of the value proposition for Ryder. So the threat of electrification is less maintenance activity. Their value prop diminishes. So while I was at Ryder, I was very aware of all of the disruptive technology going on you know ev av connected vehicles so i was pretty much obsessed with all of that for much of the last several years and during 21 my last year at rider got to meet with most all of the oems the original equipment manufacturers across north america and kind of really walked away with a good solid i think insightful understanding of how the development is progressing where we are when and where penetration is going to occur for electrification so i've gotten you know pretty

pretty knowledgeable about the industry for somebody who's never driven a truck. I got to sit in the Tesla semi prototype cab in 2019, which is a pretty cool experience. So, uh, you know, obviously Allison, their transmissions overlap a lot with Ryder's fleet. And, uh, as I, after I left Ryder, uh, I think I, I came to realize, um, that there seemed to be a valuation disconnect to Allison and I, it's now one of my largest investments. All right. That is very interesting. And I think we need to get you back on to talk about the electrification transition for the automotive space, because I already had like three questions in my head about that. But today's episode is about Allison Transmission, ASLN. We're going to hit the electrification stuff again.

Don't worry about that. But first, I want to talk about competitors. Are there any competitors to Allison? And what has enabled them to last for over a century? Because I think one of the highlights from looking at, say, their investor relations, just the basic stuff from what we were doing researching it, is the company has been around for over 100 years. I think that's kind of a testament to any sort of durability. Yes. So I'll do a little bit of, I guess, a history, kind of how the company came to be, its progression over the years.

Because I think a big part of when we talk about this before we started recording is that they have decades and decades of of tribal knowledge that they've accrued and accumulated that it make it, I think, very difficult for new entrants to compete with them. There are a couple of competitors, but I guess before I talk about them, we kind of step back. You know, Allison was founded before World War One. You had the automobile was just kind of coming coming up. And James Allison is the owner of the Indianapolis Motor Speedway, which they ran this Indianapolis 500 mile race. And, you know, as World War One hit, his engineering kind of skill set afforded them what became Allison the business to work on plane engines. So they were building the plane, the aircraft engines for World War I planes that continued into the late 20s when they were bought by General Motors. Really, the current iteration of Allison, as you think about it, didn't happen until after World War II.

In the late 40s, the General Motors owned Allison basically began to figure out ways to use the transmission in different ways. It went into a transit bus in, I think it was 46 or 47. It went into trucks by like 48, 49 military vehicles. It's the Allison transmission has been in the U S main battle tank since the end of world war II. So kind of fast forward a little further along as the automatic transmission was getting more penetration into transit and on highway and in the military vehicles you had then what basically GM combined

allison and detroit diesel detroit diesel is the is currently owned by daimler daimler trucks north america that's their engine business so you had allison the transmission business combined with detroit diesel the engine business for around a decade so i think that in the 70s to 80s you know there's obviously some deep learnings that they are able to glean kind of being all in the same house hold, if you will. Detroit Diesel got sold to Roger Penske in the late 80s. Allison stayed with General Motors. Eventually, of course, GM, during the 2007 bankruptcy, Allison was sold to Private Equity, Carlisle and Onyx, who then IPO'd it in 2012. And it's actually, from an enterprise value perspective, trading, it's close to the lowest

it's ever traded it's run up in the last few months but um late last year was actually the lowest valuation it had during that time so which i think is interesting um but that they have been part of u.s military international military you know for for both tracked vehicles like tanks as well as wheeled vehicles buses trucks like we talked about uh and and their transmissions are really viewed as the pinnacle. That is a premium product, and it delivers substantial value for end users, which is why they are able to garner these really high margins. If you think for an industrial component maker, you don't usually see 35 or so percent EBITDA margins and 20-ish percent net income margins. So it's a very profitable cash-producing business that all really relies

on the intellectual property that they've built up over the decades um they have a basically a perpetual royalty-free license from gm for some of the ip uh gm uses the allison brand still in in some of their uh in some of their pickup trucks even though allison the company does not compete below the class four level when you think about class four five six seven eight getting bigger and bigger gross vehicle weight ratings for trucks and commercial equipment. Allison only competes on the higher end of that. So competitors, they don't truly have a direct competitor. There is no other transmission company.

Ford Motor, for example, has an in-house automatic transmission that does compete with Allison in some vehicle classes, in some areas like motor home and lighter truck. There's really the competitor to the automatic transmission is the manual transmission. And what's come into the vogue for the last 20-ish years, the automated manual transmission, the AMT, which has really replaced the manual in line haul applications. You think about your old trucker with an 18, however many speed transmission doing all those shifts. the value proposition of something like an allison transmission is you eliminate the clutch you eliminate you make the driver's job easier you make the operation of the vehicle more fuel efficient the productivity level of the equipment rises so even though allison may

charge a premium for the transmission that they sell through to the end user the end user is going to spec the allison because they're going to get a good payback period you know two or so year payback period in terms of the fuel economy savings maybe they only have to run a fleet of 20 trucks instead of 22 trucks because of that 10% or plus ramp and productivity. So you have the incremental savings there. So they're really competing against the manual transmissions that still are most of the market ex-North America. Ex-North America, it's still like less than 5% automatic transmission penetration. But in North America, it's very saturated. So there hasn't been a lot of growth. And there is lumpiness to the growth because of vehicle cycles. Inherently,

every transmission needs a vehicle to go along with it. So vehicles are being sold, which after the Tax Cuts and Jobs Act, there was a huge uptick in vehicle sales, for example, in 2018 and 2019. And Allison made all-time highs. And then, well, if you pulled forward that demand, then you got to give it back. And of course, 2020 with COVID hit. So they're not at their all-time highs, but they're within a hair's distance, it looks like, as of today, at the 52-week high, at least. All right. Yeah. It sounds like they have some pretty strong competitive advantages, but they are in a cyclical industry. One follow-up I had on this is the way you look at it, do they have the classic scenario of they're a valuable part of the supply chain

across all the end markets they serve, but on a relative cost basis, it's not that of a purchase for a lot of these companies and does that do you think give them sustainable pricing power as kind of not not a lug nut within it it's a very important part the transmission is extremely important part uh but it's it's so valuable that they'll have pricing power for years to come is that part of the thesis and why that you think they can have sustainable margins for, say, foreseeable future? I think so, because I think when you think about commercial vehicles,

the buyer is taking a total cost of ownership lens across the purchasing activity. So it will be cheaper up front to spec a manual or an automated manual, but then you have the considerations of loss of productivity. Really, you need to think about where does the Allison shine?

And it's in activities that require a lot of precision control, a lot of low-speed stop-start activities. There's downtime associated with, say, a clutch wearing out. And with these trucks, a day of downtime, depending on the application, could cost more than the entire transmission premium itself. So there's very significant benefits to the end user to spec and Allison from both those operating cost saves and lifecycle cost saves, as well as then on the tail end selling it, you're going to get a better residual value on the equipment. So I do think it's a compelling value prop for most buyers. The challenge for them from a growth perspective is that North America is largely saturated. They own the market in most of their core markets. You think about class eight straight trucks, your refuse trucks, your dump trucks, your

concrete, whatever. They're almost 80% market share there. School bus, similarly, almost 80% market share. So it's hard to get incremental penetration there. But that's where it comes back to. And to be fair, they've been talking about this for the decades since they came public that the real growth angles are ex-North America. But people might in South America and in Asia not have as much familiarity with the automatic

transmission. So it's a long sales process to try and introduce the transmission to new markets. They've gotten a bunch of new products they've released over the last year or so that makes sense when you look at like their R&D expense has risen fairly meaningfully in the last few years. But they're bringing a lot of products to market targeting hydraulic fracturing. They have been in oil field services for decades. They have a new hydraulic fracturing transmission from, you know, they have a transmission

They branded TerraTran, which is more for think like mining and that sort of application, which they sized it as 50 million in incremental revenue for China. Wide body dump trucks, for example, just that incremental market that they are trying to penetrate. So there's a lot of like they have to find the applications that it makes a lot of sense. And by the transmission delivers that solid payback period, compelling value prop for the end user. and you know it's of course easier for them in markets that the end user is already aware of of it you know in the north america and out in in the u.s a lot of consumers know of allison because the transmission used in like the chevy you know pickup trucks so there's some lack of awareness i think of the value prop of the fully automatic transmission in different parts of the

world that they've been trying to overcome um yeah in toronto every arrival is a statement and nothing says it better than this. Cadillac Optic was the number one selling luxury EV in Canada for 2025. Find your rhythm across a seamless 33-inch display and an immersive 19-speaker AKG surround audio system. This city demands agility, and Optic delivers with precision to make every drive extraordinary. Let's take the Cadillac.

Find out more at cadillaccanada.ca. Luxury sales claim based on S&P Global Mobility Canadian New Vehicle Total Registrations for Calendar Year 2025 for the Cadillac Definition of Luxury. Okay. I guess maybe the Bayer thesis or what in kind of researching this business, what seemed to be one of the looming concerns was, and you already mentioned it, the electrification of their end market vehicles. What are your thoughts generally on this and sort of that trend and how do you think it impacts Allison? Yeah. So the trend has been talked about for years. Obviously, it's not new information to the market. I mentioned what I was working on at Rider in my last year there. And Rider put out an investor day in 22 that included the findings of this where basically it's not happening overnight. It's going to take a very long time for medium and heavy duty equipment to electrify.

There's a lot of underlying investment that has to be made in infrastructure that you need to also really deliver a compelling reason for a fleet to switch. And that's the angle Allison has taken, that they've made some investments in electrification. They bought Axel Tech's electrification systems business in 2019. um they have products ready to go e-axle products so when you think about electrification if it's true full electrification right you're gonna have a battery pack you know electric motors and you're gonna have to deliver the power from the electric motor to the wheels and for a lot of uh commercial applications it's it's looking like it'll be an e-axle where it's basically uh Sitting on the axle itself is the transmission, if you want to call it that.

So the concern is Allison has these really high margins in its current business, the automatic transmission. They have a ton of know-how, so it would make sense that they'll be a viable competitor in an e-axle world. But the challenge is that the margin profile is expected to be less. So they're not expected to earn 35 or so percent EBITDA margins. in this world. And the question, the huge question mark, the many billion dollar question mark is what are the margins settle at? When do they get there? You know, what does this adoption uptick look like? There's literally hundreds of electric commercial vehicles on order across all the OEM order books. We're talking hundreds out of three, 400,000 vehicles that are sold on an

annual basis in their core market. So from a current penetration perspective, it's extremely low. Obviously, the Inflation Reduction Act passed, and that did add up to $40,000 tax credit for new commercial vehicles that are electric. So Rocky Mountain Institute, I saw their analysis showed the pull forward of total cost of ownership parity about two years. My time at Rider informed me that you need to have compelling TCO advantages before you're going to get adoption and you're not there yet for most of these applications if you exclude say a california that's just throwing gobs of money at it right the only reason the tesla semi is being used by pepsi co is because the state of california paid for it um and and then you've

also got to think about from an electrification perspective if i'm tesla i could put 900 kilowatt hours of batteries in a semi and sell it for, let's call it $300,000 or $400,000. Or I could put 12 75 kilowatt hour packs in the Model Y and sell 12 of them. I'm going to get more gross margin dollars selling 12 Model Ys than selling one semi. And while they obviously announced last week that they're going to begin this semi production, I'm skeptical that you're going to have a rapid uptick. If you're a fleet operator, you need to invest in the necessary infrastructure. Then you need to invest in the equipment. You're not going to do an all-in in your first cycle. You're going to order a couple of vehicles. You're going to want to test it out. These are

inherently conservative operators. They are not buying a second car that they can afford for it to have downtime. They need uptime. Their business is uptime. And I think you will see conservatism when it comes to the adoption of electrification that's what the conversations with the oems uh the traditional oems at least kind of communicate um our experience with rider talking to customers like you'll get some big corporate customers who you know want to from a from a pr perspective put out you know these headlines and these prs that they're ordering electric trucks but it's still not that they're converting their fleets in full and it's still very, very early. So you also have to consider that there's beyond just pure electrification,

there's a lot of lower carbon fuel options, whether it's instead of a diesel, you have a natural gas engine, you could run on a renewable natural gas, you have the fuel cell. For fuel cell electric, there could also be a hydrogen internal combustion, which Cummins is working on. If there's internal combustion, there will be an Allison. So if you see some cleaner forms of internal combustion taking share, there's a lot of applications where it makes sense that you would maintain the internal combustion engine over electric vehicles. Think about that semi. That's 12,000 pounds of weight. And when you think about what the work the vehicle is doing, if it's hauling potato chips like a Frito-Lay truck, that's fine because the truck cubes out before it weighs out. But if you're hauling aggregate and you're hauling something where weight is the constraint, well, you've now lost X percent of your payload capacity, which now means you need to operate how many more trucks, which you need to think about those from a system engineering perspective. And I think that's where a lot of times people maybe miss the reality that electrification actually makes the entire solution a lot more complicated for the fleet. And it's not to say that fleets won't electrify, but I think that they will electrify more slowly than maybe the risks are priced into the stock.

No, right. It seems like the heavier the battery, the harder it is, or excuse me, the batteries are not, from an electrification perspective, they're not dense enough yet to make it work for these long haul trucks. And they're probably going to be the last ones to get there, just given the size and the need of that from a power perspective. But let's talk about another risk I think people are probably thinking of or maybe concerned about. It also might not be a risk at all. You can let us know. What impacts do you think any deglobalization trends could have on this company? Could it affect their supply chain? Could it affect their customers?

Have they talked about this? What are your thoughts? so de-globalization for them when i think about what they're sourcing uh what what are they making right they're getting raw they're getting manufactured aluminum and steel products that they are that is the primary cost right in terms of the cogs line you know two-thirds of it is the metal that's going into the transmission. The other third of it is the overhead and the direct labor costs. So are they sourcing the aluminum and the steel from disparate foreign markets? No, not really. They do have manufacturing sites, chiefly the primary sites in Indianapolis

and Indiana. They do have manufacturing in Eastern Europe and also in India. So I don't see it as a big risk to them um and they whether whether we have you know a shift away from globalization or not unless you know you have i guess tit-for-tat tariffs getting put on like american manufactured goods but then i guess i would get back to you know well they could just locate that manufacturer of the transmission in india or in uh i think it's hungary so i i don't I'll see it as a huge risk to them personally, no. What would you describe as sort of their, how would you describe their competitive advantages?

Because it's, you know, you think about the business, like when I first think about a manufacturing business like this, I think, well, you know, someone could come along and do something like this, but then you sent me a video, which we'll link to in the show notes if anyone wants to watch it, of one of their facilities. And it really kind of got the point across to me that this is harder than just copying them.

So how would you kind of describe the competitive advantages here? Yeah. So I think I alluded to the concept that they're in such diverse end markets and duty cycles that they know better than anybody what the right product is for a particular task at hand. whether it's distribution, emergency, motorhome, transit, military, they're all across the vehicle spectrum. So they have a lot of, I think, that tribal knowledge they've built up over decades. The actual, as you said, Ryan, the assembly of the transmission itself is more steps than you would think. So could a Chinese competitor reverse engineer the transmission and try to compete with them. I'm not really inclined to believe that's a serious risk because all of that

duty cycle know-how and engineering expertise is, even if you could replicate the transmission, you're not going to have all that. You're not going to have a service network. They have 1,400 service locations around the world that, again, you'd have to replicate that service network. And it gets back to, I think that the reality is, if you're wanting to compete in the automatic transmission space, and you know, you have these threats, and you have a really, I would characterize, you know, well capitalized, knowledgeable, impressive incumbent, it doesn't strike me as a very attractive profit pool to try to dip into. And, you know, if you're, if you were to think about it, the truck makers are trying to vertically integrate,

and in many markets, they have, but the transmission is not a thing that most truck makers have ever, on the automatic side, at least done, you know, they do make automated manual transmissions uh like volvo and daimler and um i guess a volkswagen truck now who bought navistar but they're they're making they're making something you know they're basically taking these pieces of metal and making them work for the vehicle more efficiently than anyone else um you know we talked about competitors earlier like they do have some automatic transmission competitors. ZF, the German company, does have an automatic transmission that competes and that they brought to North America within the last couple of years that, as far as I'm seeing,

isn't meaningfully taking share. But there's a smattering of companies that make automatic transmissions. But there's not one company who that is their business. Allison is the only one where that is their business, if that makes sense. Makes sense. All right, let's talk valuation here. You kind of mentioned, I think, before the show, there might be some investor fatigue here, just in terms of the stock hasn't gone anywhere despite some business improvements, just due to some multiple compression. What does the valuation look like today? Could you maybe give some numbers just for context? And then how do they return capital to shareholders? I'm going to answer the last part first, because if you want to see a beautiful chart, look at Allison Transmission's shares outstanding since that IPO in 2012.

They've basically cut the share count in half. That is the primary use of cash and has been and will continue to be their discipline team. The CEO has been with the company since GM sold it to PE, and he was the CFO. and then he became the ceo i think his five-year anniversary is coming up so you've got a ceo who was at the helm during the global financial crisis and they alluded to this in their last couple earnings calls that like they've been de-levering they're under their target leverage their target leverage is you know up to three times net debt to ipda they're around two and a half right now so they've de-levered it below target and they're they're kind of like look we've

we've seen recessions before. We are prepared for a recession. They are going to continue returning cash to shareholders because what else are they going to do? They are investing in those growth avenues, ex-North America that we kind of talked about, as well as electrification investments. CapEx as a percent of revenue is like 5% on a last 12-month basis. And it had gotten up to like 7% or so, which in like 19 and 20 was on the back of some acquisition activity and those investments into, I think, these electric axle products that, again, are still not even in scaled production. It's still very, very early. But they've been making those investments. So that's one area they're deploying cash. I know that explicitly they've laid out

a 15% is their internal hurdle rate. So if they're going to deploy capital into new projects internally, they're going to look to have an IRR above 15%. Otherwise, that's where capital return to shareholders through the form of buybacks is the primary use of operating cash flow. And just from a rough valuation standpoint, the last 12 months, currently, the free cash flow yield to EV is a bit over 7%. And of course, since they have that leverage, the free cash flow to market cap yields around 11%. So free cash flow per share has been growing as a byproduct of those share buybacks. And I think that will be a primary contributor going forward. is that they have this capital allocation approach.

They've been pretty disciplined with it. They're going to continue to buy back shares. They have over a billion left on the current authorization that they expanded last year. And I think the nice thing is they've, knock on wood, proven that they aren't the type of management team that's just going to go out and do some frivolous M&A or try to build a kingdom.

They're disciplined operators. They know how to run this business. And they're returning capital to shareholders dutifully. They do have a dividend as well. I think it's like a two or so percent yield. So you're getting a pretty impressive yield as a shareholder in the form of free cash flow per share is going to continue to grow just by virtue of that capital allocation approach. And I'm sorry, Brian, if I missed the first part of the question. No, no, you hit on it.

I guess we only have a couple of questions left. Do you think this is like a bigger business sales wise in a few years? so there's a couple avenues of sales growth i mentioned this they sized a couple of them this wide body dump truck so there's various end markets china is a space they've really been focusing on outside north america in north america there's some incremental on-highway opportunities so think about maybe like a u.s food or think like some you know distributor who you know is going to run a truck from in like a regional type application where i guess i wasn't fully clear uh you know they don't compete in line haul freight allison

transmissions do not go into your over the road trucking application because the relative benefit of the transmission doesn't bear out because you're if you're mostly in a you know cruising at the highway speed duty cycle for most of your operation the cost benefit doesn't pan out for the allison but think about like these regional applications for you know a class a tractor whereas they've not historically played in the class a tractor space they see up to a hundred million dollar a year revenue opportunity to play in this regional hall tractor they basically took one of their existing transmissions they made some modifications to it uh they started selling it in 21, I think, to Navistar. In 2022, they started selling it through Daimler trucks and

Volvo, and that's taking some share. So you've got growth opportunity from the regional haul, from the wide-body dump truck. They also have growth opportunity they see in hydraulic fracturing transmissions. So those are the primary growth angles beyond if you were to see an outsize uptick in automatic transmission penetration in, say, a Japan or a Korea or some other you know ex-north america markets but and most of the volatility comes from those off-highway markets your energy markets your your mining right those are very cyclical industries and they're they're on highway it's it's actually like 30 to 40 is what they say of their north america on highway goes to municipalities so whether it's a bus or an emergency vehicle like

a fire truck or ems or whatever it's like the there's there's cyclicality and you know off highway but like a lot of that core on highway is less cyclical right if you you know if you need to replace the fire truck it's going to get replaced you know um so so i would say it's less of a impressive growth story and more of a you know the multiple right from like a forward ev to EBITDA. So we talked about this. If you go back a decade, the EV to EBIT was close. It was in the high teens for much of the last decade. Really, it was like 2017. I think fears of electrification have really dragged down the multiple. So even though the business has performed well, the stock price is mostly flat since then because you went from in the beginning

2017 you went from a forward ev to ebit multiple of 18 to today you're at eight so that multiple compression uh it's it's mostly i think in the tail view um you know famous last words uh it can of course go lower anything can happen but when i think about the relative risk of electrification to their markets in the near to medium term there's of course a lot of uncertainty medium and longer term around what does electrification look like to them, it's clearly going to be bad for margins. But on the other hand, you get more content in the vehicle. They talk about anywhere from three times as much content in maybe a box truck that uses an e-axle versus an Allison automatic to maybe it's up to 15 times as much content if it's like a transit bus

solution. They've been doing hybrid bus for 20 years now, so they have a lot of know-how. um, in, you know, managing these complex systems. Um, so there's, there's risk with anything, but when I think about the relative likelihood of new competitors coming in and taking away their legacy, it's more about, will they have challenges when they fight with Cummins who just bought a Meritor and Dana, when e-axles come into the kind of the vote and begin to take meaningful share, you're probably going to have, you know, all of them competing for a smaller, um, margin slice of pie and for allison it's margin um detrimental and for dana it's accretive so dana will talk it up allison will talk it down and you gotta kind of follow in between the lines to

understand you know where things are really going all right last question before we let you go you talked about the electrification risks at you know a lot and clearly that can you know be something to worry about over the long term but what do you think the biggest risk here for allison are maybe outside of electrification? Let's do a little pre-mortem. What could cause the stock to be flat five years from now? It can be flat five years from now if PE takes them out and levers them up in private markets. I mean, it's kind of a goofy response, but honestly, I think a big risk to shareholders is given how much they've delevered and given the kind of consistent generation i think that they are an attractive pe takeout um given the relative

valuation and low amount of leverage that they have with them you know and i guess what other pre-mortem issues would be if you have uh incrementally more of a push from government and regulators to either ban or outlaw internal combustion that would of course be a negative because they're going to have fewer opportunities to pair a transmission with an engine if you're going to have more states kind of following CARB down that path. I just don't think realistically, though,

that can happen in the real world. It gets back to the, we have the limited amount of resources to put into automobiles when it's battery pack. And I just don't think there's enough yet. Maybe something will change If there's a solid state battery evolution, is there something revolutionary there where solid state batteries are commercialized more quickly than expected? You know, that would overcome some of the payload concerns that electrification in its current state has and could make electrification more attractive and take more share more quickly.

But I'm not really being facetious when I say a real risk, I think, is a PE takeout. All right. Well, I think that's all the questions we have. I guess for listeners that want to keep up with you or see any more of your thoughts, what are the best places to do that? Yeah, I am still addicted to Twitter. Mr. Musk hasn't gotten me to boot him yet, but at Rod Altman is my handle on Twitter. I'm also very active in Discord. I use my UberKicks11 handle if you want to join the GME DD or the Wook Discord. I'm pretty active in there.

sharing my thoughts on things as well. And yeah, if you're interested in what capital management, you know, again, we, we're kind of continuing to put out different programming to try and help investors, you know, learn and grow. We did a book club last night that we recorded, you know, going through Seth Klarman's margin of safety, we're going to do monthly book clubs last Tuesday of the month at 8pm on spaces. And then we do a weekly call on Fridays at the close, we call it the Wook and Review. And we kind of talk about what are some of the major news headlights impacting markets. This week, we'll of course talk about what Mr. Powell is talking about right now as we record this program. And then we'll talk about tech earnings as we get Apple and Google and

Amazon on Thursday. So we do that on Fridays. We record it. We put it up on our Apple Capital YouTube if you want to check it out if you can't make it live. But yeah, all over the place and always happy to talk and chat with anybody about anything investing related. Perfect. All right. Well, that's going to do it. We want to throw a disclosure on this. Brett and I are not financial advisors. Anything we say or discuss here on Chitchat Money is not formal advice or recommendation, and we are general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thank you, Rod, for joining the show again, and we will see you all next time. Okay. I'm welcomed by the founder of our

exclusive sponsor stratosphere.io uh braden dennis braden welcome i wanted to basically give listeners that are interested in stratosphere more context around what the platform is so let's start there what is stratosphere and then why did you decide to start it yeah thanks for having me i appreciate it and i'm glad to be sponsoring the podcast as a listener myself i like the deep dives i like the different guests the different perspectives on uh some interesting companies. So I think it's a good concept for a podcast, which is what led me down to making Stratosphere in the first place, which was I was making content online and frustrated with the tools that were available to me. So I started building a very scrappy version of the

product just for free, just to figure out how can I overlay 10 years of financial side-by-side Up to 35 years we have now. And how can I actually build out a proper database of company KPIs that are not just revenue, but if you're looking at Costco, how many warehouses do they have? How many paid members are in our Costco members? Or if I want to do a comp against the streaming, How many Netflix subs versus HBO+, Discovery+, Disney+, how do I build out proper comps of those? Because those are the metrics that actually move the business. Those are the ones that actually move the needle more than any gap financial metric you'll find. And so it started off as just purely a passion project.

And I figured, let's just make the leap into entrepreneurship and see where it goes. And it brought us here today. Yeah. And like you mentioned, it is the stuff that you can't find anywhere else, at least not in a, I mean, you could find it page by page on their financials. Exactly. You can go through 35 PDF filings and find it. Be my guest. And that's basically what we did for a long time. So what do, I guess, maybe describe the pricing model so people know, but you're going to say there's a free platform. What do free users get? Yeah. Good thing. Because our mission was to always build a free platform. And so we really kept true to our mission and give an amazing platform for free, which gives you 10 years of financial statements on 40,000 global securities. So we don't list you just to US

securities. It's on global stocks. We give you a watch list, the screener, comparisons on competitors, fundamental charting up to 10 years, filings, transcripts. You can look at the press releases right inside the app, news, ETFs, funds, super investors, hedge fund letters, investor holdings, and financial calendars. Those are all the features you'll get on the free tier. Now, on the middle tier, the personal tier, you're going to unlock up to 35 years of financials just kind of like nice to have like quality of life like notifications being built in um price targets for building models uh like business owner mode where you can hide prices like kind of like just that next level for for individual investors who want to level up and then the the

top tier is for like investment teams and professionals who want to unlock that kpi data and request kpi coverage as well like a firm will be like here we want these 10 names in our coverage and in your coverage. And then you'll have basically our entire universe that we're looking at, which is great, right? Because like earning season comes around and we have it updated within 15 minutes when Netflix comes out with their net subscriber ads, like it's right there in one place, especially easy to handle around the peak of earning season that matters a lot for these people. And so we have a premium tier for that as well. That's the three plans that are available today. And now a perfect time to shameless plug our code. If you use CCM,

you get 15% off any of the paid plans, but I think that covers it pretty well. If you're interested, please go ahead and check out stratosphere.io. We'll have a link in the description as well, but thank you, Brayden, for joining us. Ryan, keep it up. I really like what you and Brett are doing and I'll be listening along.