Allison Benefits From New Defense Contract as Commercial Activity Declines; Lowering FVE to $51

Despite challenging conditions in the first quarter, Allison Transmission Holdings’ GAAP EPS of $1.20 beat CapIQ consensus of $0.93. Strong sales of defense transmissions and growing penetration into lighter vehicle classes (4 and 5) contributed to the outperformance. Before the coronavirus pandemic disrupted operations, we expected Allison to experience a meaningful hit in many of its end markets that were becoming increasingly conservative with their capital spending. We anticipated this conservatism to be partially offset by robust sales of Class 4-5 transmissions, which more than doubled between 2018 and 2019, due to the success of the Navistar CV and GM Silverado lines that employ them. This appears to have been largely the case. Even with COVID-19 causing disruptions in March, Allison’s largest end market, on-highway, declined a relatively modest 7%. While its core Class 8 straight truck transmission business is already far less volatile than the larger Class 8 tractor market, penetrating into lighter vehicles diversifies its customer base and helps smooth revenue. Yet, we believe fleet belt tightening across customer categories will lead to a greater than 50% volume decline of on-highway vehicles in its 2020 addressable market partially offset by further share gains.