The auto industry is under pressure like never before to make cars that are more fuel-efficient.

The stock I have for you this week plays a big role in making that happen.

It’s the world’s largest manufacturer of fuel-efficient transmissions… for both consumer and military vehicles.

It has 60% of the global market in its sector… and it’s also a leader in hybrid systems.

And with global tensions leading to more military spending… it’s a stock that’s in the right place at the right time.

It’s already up 10% this year… bucking the overall market trend with little volatility.

This solid auto parts play will bring safety and security to any portfolio.

Find out what it is in this week’s Stock of the Week.

Click on the image below to watch the video.

Transcript

Hi, everyone, and welcome to my Stock of the Week. I’ve got a really good one for you.

You might think, “Well, wait a minute, Alpesh, that’s going to be pretty difficult to pick, given the uncertainties going on in the world… given what’s happening with Ukraine… rising inflation… we don’t know which direction interest rates might go, and given the crisis, might they just be on hold instead of rising… rising costs… How are you going to find something?”

Well, you’ll be pleased to know, of course, I’ve got a big research team as part of my GVI Investor research service. So it’s out of all of that research that we’re able to always pull something out for you. And you’ll see as you’ll listen to this how we do it and what we like about this one.

So this one, this week, it’s called Allison Transmission Holdings (ALSN). And “transmission” means the thing in the cars and the vans, the transmission.

This is the world’s larger manufacturer of fully automatic transmission for commercial vehicles. That’s a lot more fuel-efficient – fuel efficiency, key importance, right? – than less expensive manual systems, right? So you’ve got the fuel efficiency, and it helps serve for fuel saving, and that’s the name of the game at the moment.

Not only that, they supply their products into a variety of markets: on- and off-highway equipment and military vehicles. Guess who’s going to be spending a heck of a lot more money on military vehicles? Well, Germany, for a start. They said they’re going to spend $100 billion on upping their defense spending. Some of that will be going on vehicles.

For the on-highway business, Allison has 60% of global market share – 60% global market share. They’ve been a leader in commercial hybrid propulsion systems as well. So you got that whole hybrid thing going on, EVs, which is what they’re making inroads into as well.

So good growth pipeline for the future… and also you can see with current economic events why it’s my Stock of the Week.

So let’s have a look at some of the numbers. Up until now, numbers haven’t been phenomenal – in terms of share price performance – haven’t been phenomenal up till now. So in 2017, you had a 27% rise. In 2018, just 1%, pretty insipid… 2019, 10%… 2020, it was down 10%… 2021, it was down.

So you might say, “What are you thinking, Alpesh?”

Well, this is it. So far this year, it’s up nearly 10%. All right. Now, that’s the first point. That’s bucking the trend for the rest of the market.

And that’s important because in this market, if something’s standing out, especially when the markets have got so many headwinds, then it grabs my attention. But if it can stand out and also… with the value-growth rating that I have… and remember, my team, we research valuation of the companies, revenues of the companies, earnings growth of the companies, dividend deals, cash flow, consistency of performance… a whole array of things as part of my GVI Investorresearch.

This has got a 9 rating out of 10.

Cash return on capital invested: 11%. That puts it as one of the best companies in terms of cash return on the capital that they are investing. That’s good.

Over the last six months, it’s up as well – not just this year, but even over the last six months.

Sortino in terms of reward for return… No, it’s not been fantastic. But I think in this scenario, it’s a classic example of a company which has been lagging for a bit and now it’s coming into its own because of what’s happening in the world at the moment, but also it’s in a good, solid position even before this.

So it’s just found the right time, right place to springboard. Volatility relatively low at only 10%, and that’s what I want in this environment. I’m not going for the crazy-high-volatility stocks at all right now.

What other things did I find attractive?

Well, cash return on capital invested, return on equity, just in terms of as a measure of quality. So in terms of shareholders’ capital, how are they generating a return for shareholders? What about generating cash flow? What about valuation?

I look at the valuation figures… forecast price-earnings ratio of 6.8? That’s just dirt cheap. I mean, you’re pretty much looking at a takeover candidate here. Price-to-net-asset value… again, cheap. Price-to-free cash flow… cheap as well.

Now, whilst the analysts have set a relatively low target price to the upside, I think that’s really just them being cautious in this global environment and also because in the past the company hasn’t sort of blown the doors off. Well, it wouldn’t have, would it? Because up till now, the world hasn’t shifted so much into concerns over fuel efficiency the way it is really right now.

And as I said, the evidence of that is how the share price has done while the rest of the market’s fallen. It’s been one of the few rises.

Pre-tax profits holding up and, if anything, growing over the last couple of years. Total assets holding steady… turnover holding steady… borrowing not rising… operating cash flow holding steady.

So a good backdrop for the company to do well really going forward. And in this kind of environment, tactically, we’ve got to look at these kind of companies, in my view, rather than trying go for the sort of, “Let’s just swing for the parts… swing for every ball that we get.” I think we need to tone it down a bit and say, “Right, again, what’s solid? What’s safe?”

Now, if you like what you’ve heard, then obviously, as you know, through my GVI Investor, we get into a lot more depth into all of these kinds of things and pick out stocks where we do a ton, ton of research into them.

This is just to give you a little bit of flavor of the kinds of research we do, kind of in-depth analysis we go into… just a little bit of a tip-of-the-iceberg snippet.

Well, I’ve been Alpesh Patel. Thank you very much for listening, and I hope you found that educational and informative. And well, I guess in this environment, stay safe.