This Transmissions Company Is Likely To Offer Better Returns Over Deere Stock

We think that Allison Transmission Holdings stock (NYSE: ALSN), a relatively small company that manufactures commercial duty automatic transmissions and hybrid propulsion systems with a market cap of under $4 billion, currently is a better pick compared to its industry peer Deere stock (NYSE: DE), given its lower valuation and better growth prospects. Allison trades at about 1.7x trailing revenues, compared to 2.7x for Deere.

Even if we were to look at P/EBIT ratio, DE stock appears to be more expensively priced with 13x P/EBIT ratio, compared to 8x for ALSN stock. Although Deere has seen better revenue growth over the recent years, Allison Transmission is more profitable, and it is likely to offer better returns. We believe that the gap in valuation of these two companies will narrow in favor of the more attractively priced stock – ALSN, as we discuss in the sections below. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis Deere vs Allison Transmission: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Deere Revenue Growth Has Been Stronger

• Deere’s sales have jumped from $26.6 billion in 2016 to $42.4 billion over the last twelve months, while Allison Transmission’s revenues have risen from $1.8 billion to $2.3 billion over the same period.
• Deere’s revenue growth of 19% over the last twelve month period was much higher than 6% growth for Allison, given a sharp rebound in equipment demand for the construction industry, along with continued growth in agricultural equipment demand.
• Allison’s revenue growth was adversely impacted by supply chain issues, labor, and raw materials constraints that have weighed on the overall commercial vehicle supply.
• Looking at an even longer time frame, Deere’s last three-year revenue CAGR of 7% is much better than -1% CAGR for Allison Transmission.
• Looking forward, with economies now opening up, the demand for agriculture and construction equipment, as well as commercial vehicles, is likely to remain high in the near term, boding well for revenue growth of both the companies. Our Deere Revenues dashboard provides more insight on the company’s revenues.
• Deere’s revenue is expected to continue to grow at a faster pace compared to Allison Transmission. The table below summarizes our revenue expectation for DE and ALSN over the next three years, and points to a CAGR of 11% for Deere, compared to a CAGR of 7% for Allison Transmission.

2. Allison Transmission Is More Profitable But With Higher Risk

• Allison Transmission’s operating margin of 22% over the last twelve month period is better than 19% for Deere.
• However, if we were to look at the recent margin growth, Deere stands ahead, with last twelve month vs last three year margin change at 5%, compared to -4% for Allison Transmission. That said, historically, Allison Transmission has seen better operating margins compared to Deere. Our Deere (DE) Operating Income Comparison and Allison Transmission (ALSN) Operating Income Comparison dashboards provide more details on the companies’ operating income and margins.
• Looking at financial risk, Deere is more attractive with lower risk compared to Allison Transmission. Its 63% debt as a percentage of equity is much higher than 28% for Deere, while its 6% cash as a percentage of assets is lower than the 9% for Deere, implying that DE has a better debt and cash position, and ALSN stock is a comparatively more risky bet.

The Net of It All

• We see that the revenue growth has been stronger for Deere and it offers lower financial risk compared to Allison Transmission. That said, ALSN is more profitable and it is trading at a comparatively lower valuation.
• Looking at future prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe ALSN is the better choice of the two. The table below summarizes our revenue and return expectation for DE and ALSN over the next three years, and points to an expected return of 10% for DE over this period vs. 18% for ALSN, implying that investors are better off buying ALSN over DE, in our view. Our dashboard Deere vs Allison Transmission has more details on how we arrive at these numbers.
• Note that Covid-19 is proving more difficult to contain than initially thought, due to the spread of more contagious virus variants and infections in many geographies, including the U.S. and Europe, are higher than what they were a few months back. The concerns around Omicron have spooked the markets at large. If there is another large spike in Covid-19 cases from the new variant, resulting in any disruption in economic growth, it is likely to impact sales of several companies, including Deere and Allison Transmission.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.