Why Allison Transmission Stock Popped on Monday
Key Points
Allison Transmission will soon acquire Dana's off-road division.
To make this happen, Allison will have to take on a lot more debt.
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Shares of truck transmission manufacturer Allison Transmission (NYSE: ALSN) jumped 3.3% through 1:15 p.m. ET Monday -- and you can thank Wall Street analyst Raymond James for that.
RJ just upgraded Allison to "strong buy" with a $110 price target.
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RJ hearts Allison
Raymond James cited Allison's pending acquisition of Dana Incorporated's (NYSE: DAN) off-highway business for its upgrade, as TheFly.com reports.
In June, Allison entered into a definitive agreement to acquire Dana's Off-Highway business, which builds power trains for machines in the construction, forestry, agriculture, and mining segments for $2.7 billion. Last month, the companies announced they'd received all required regulatory approvals for the deal and were ready to proceed, with a closing date set for later this month.
RJ notes that once the deal is finalized, Allison will have a more balanced mix of on- and off-highway revenue -- as well as $2.5 billion more revenue than Allison currently has.
Is Allison stock a buy?
Is that enough to make Allison stock a buy?
Valued at $7.7 billion in market capitalization, and with just under $700 million in trailing earnings, Allison trades for 11 times earnings. That wouldn't be a problem if Allison were growing a decent amount -- but most analysts polled by S&P Global Market Intelligence think Allison will struggle to grow earnings even 1% per year (before factoring in Dana).
Adding Dana should provide a growth spurt. However, Allison already carries $1.5 billion in net debt and will have to take on more to buy Dana, likely increasing net debt to $4.2 billion. This could push its enterprise value up toward $12 billion.
At a presumed enterprise value of 17 times earnings, Allison is about to look a lot more expensive -- and a lot less like a buy.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Allison Transmission. The Motley Fool has a disclosure policy.
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