In 2007, automotive giant General Motors (NYSE:GM) announced it was selling its Allison Transmission business to a group of private equity investment shops. In mid-March, these private equity players brought some of their stake in Allison Transmission (NYSE:ALSN) to the public markets. The stock hasn't moved much during the past couple of weeks, but could if and once the company starts growing consistently.
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Allison bills itself as the "the world's largest manufacturer of fully-automatic transmissions for medium-and heavy-duty commercial vehicles." It also sells heavy tactical vehicle transmissions to the U.S. military and sells hybrid-propulsion systems for transit buses. In 2011, domestic highway vehicles made up 34% and off-highway (e.g. mining and construction transmissions) made up 13% of total sales. Its international business brought in another 17% of sales. Buses accounted for 6% of sales and military 14% of the top line.
For the year, Allison reported total sales of $2.2 billion and net income of $103 million, which worked out to 57 cents per diluted share. By management's estimates, its adjusted net income, which is meant to better reflect the recurring profit potential of its operations, was $305.4 million. The outstanding share count, which includes the shares issued in the IPO, was 183.3 million shares. Another indicator of a company's ability to generate capital is through free cash flow. For the year, Allison generated $469.2 in cash flow from operations. Subtracting capital expenditure of $96.9 million resulted in free cash flow of $372.3 million, or $2.03 per diluted share.
Allison's customers include many leading original equipment manufacturers such as Navistar (NYSE:NAV), Oshkosh Corp (NYSE:OSK), Paccar (Nasdaq:PCAR) and Terex Corp (NYSE:TEX). Interestingly, the sale from General Motors allowed Allison the opportunity to undertake an account maneuver to amortize $3.3 billion in intangible assets, and save $315 million in taxes through 2021 and another $183 million in 2022, provided it stays firmly profitable and can use the deductions.
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The Bottom Line
The private equity players sold nearly 22 million in shares during the IPO. None of this went to Allison. Overall, the transaction represented a way for the private owners to cash out of some of their positions. Allison took on substantial debt as part of the private equity purchase transaction that resulted in $218.2 million in interest expense during the year. As of year-end, total listed debt was $3.4 billion and it looks like debt stayed right around this level during the IPO.
For prospective investors, Allison's operating performance over the long haul will determine how the stock performs going forward. The hefty debt load is certainly a negative, though it remains to be seen if management will look to pay it down as the economy improves. The latest economic recovery has helped boost sales, and research and development costs have increased, which could help Allison be more competitive and expand internationally. Overall, it likely has the potential to generate a couple of dollars in profits and free cash flow annually. But until it pares debt and starts to report steady sales and profit growth, investors might be better off waiting on the sidelines.
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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.