Earnings season is among us, and with it comes the usual whirlwind of numbers, narratives, and noise. As you know, safely navigating earnings season requires more than just skimming press releases or chasing flashy metrics.
Success doesn’t go to those who follow the crowd or latch onto “adjusted” EBITDA figures dressed up for investor decks. One must consider all of the available information in company filings, including, and most importantly, the footnotes.
My firm’s high-quality fundamental research incorporates the footnotes and is proven to generate novel alpha. I showcased how to make the best use out of my fundamental data this earnings season by identifying five stocks most likely to beat estimates and five stocks most likely to miss estimates. Stay ahead of the game with due diligence.
To further demonstrate how my firm’s research creates alpha, I’m sharing a stock pick from my Most Attractive Stocks Model Portfolio, which identifies the best stocks in the market, i.e. the stocks that are not only undervalued but also possess strong fundamentals.
This pick comes with a concise summary that gives you insight into the rigor of quality research and my approach to picking stocks. I’m proud to share my work, and I want to help investors when they need it most.
Most Attractive Stocks Pick: Allison Transmission Holdings Inc. (ALSN)
Allison Transmission (ALSN) has grown revenue and net operating profit after tax (NOPAT) by 4% and 9% compounded annually since 2014, respectively. Allison Transmission’s NOPAT margin increased from 15% in 2014 to 25% in the TTM, while its invested capital turns rose from 0.5 to 0.8 over the same time. Rising NOPAT margins and invested capital turns and drive Allison Transmission’s return on invested capital (ROIC) from 8% in 2014 to 19% in the TTM.
Figure 1: Allison Transmission’s Revenue and NOPAT Since 2014
ALSN Is Undervalued
At its current price of $95/share, ALSN has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects Allison Transmission’s NOPAT to permanently decline by 10% from TTM levels. This expectation seems overly pessimistic for a company that has grown NOPAT by 4% compounded annually over the last five years and 9% compounded annually over the last ten years.
Even if Allison Transmission’s NOPAT margin falls to 22% (equal to five-year average NOPAT margin compared to 26% in the TTM) and the company grows revenue by just 3% (below ten-year CAGR of 4%) compounded annually through 2034, the stock would be worth $127/share today – a 34% upside. In this scenario, Allison Transmission’s NOPAT would grow just 2% compounded annually through 2034.
Should Allison Transmission grow profits more in line with historical levels, the stock has even more upside.
Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology
Below are specifics on the adjustments I made based on Robo-Analyst findings in Allison Transmission’s 10-K and 10-Q:
Income Statement: I made just under $150 million in adjustments, with a net effect of removing under $100 million in non-operating expense.
Balance Sheet: I made over $2 billion in adjustments to calculate invested capital with a net decrease of over $600 million. One of the most notable adjustments was for deferred tax assets.
Valuation: I made under $4 billion in adjustments to shareholder value, with a net decrease of over $2 billion. Apart from total debt, the most notable adjustment was for excess cash.
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