An insider purchase by the CFO of a 104 year old company caught my attention a couple of weeks ago and it was interesting to see it also show up in our Double Dipper list. As described in our Stocks Buybacks and the Double Dipper post last year, the Double Dipper is a list of companies that are buying back their shares while their insiders are independently buying stock on the open market for their own portfolios. We are only including management insider purchases and are excluding purchases by directors and 10% owners. The Double Dipper list has grown in recent weeks and currently has 14 companies for you to explore.
Allison Transmission (ALSN) was spun out of General Motors (GM) in 2007 to the Carlyle group, which took it public in 2012. The company manufactuers automatic transmissions for commercial and defense vehicles. One would expect an auto parts company to sport middling margins but that is not the case with Allison. In a testament to management effectiveness, current EBITDA and net margins are inline with mature software companies like Oracle (ORCL) and Microsoft (MSFT) and even better than Apple’s (AAPL) margins. The icing on the cake is the current valuation, with the company trading at 6.71 times EBITDA and 8 times free cash flow.
What we have here is a spin-off with insider buying where the company is also buying back its own stock. Right up our event-driven alley. On May 9th, the company acquired nearly 5 million shares from Ashe Capital for $232 million and authorized the repurchase of an additional $1 billion worth of stock. This brings the total amount authorized under the current share repurchase program to $3 billion. To put this in perspective, the company’s current market cap is $5.4 billion and the enterprise value after including net debt is $7.62 billion.
The question that immediately comes to mind is whether Allison Transmission (ALSN) is a value trap or is the CFO of the company right about the company being a good bargain. The company’s Vice President, Chief Financial Officer & Treasurer, purchased 5,000 shares at a price of $46 for a total value of $230,000. While not a significant purchase, this is the first meaningful purchase we have seen at Allison since late 2014 when San Francisco based activist fund ValueAct was buying shares.
The current CEO, David S. Graziosi, has been with the company since right after the spinoff from GM and took on the role of CEO in June 2018 after serving as the CFO for over a decade. I have had great relationships with most of the corporate finance folks I have worked with over the years but some of them tend to focus more on improving the bottom line and not enough on investing in top line growth. I am concerned about the same thing with the current CEO and forward guidance on revenue growth is one of the few negatives I see with the company. The current CFO, G. Frederick Bohley, started working for the company in 1991 and rose through the internal ranks to take on the role of CFO in June 2018 when Mr. Graziosi took on the role of CEO.