$72.60
$156.90
bear $72.60
base $111.00
bull $156.90
margin of safety $70.00
market price* $111.80
Allison Transmission makes fully automatic transmissions for medium- and heavy-duty trucks (refuse, construction, fire and emergency, delivery), school and transit buses, motorhomes and U.S. defense vehicles. On January 1, 2026 it completed a $2.7 billion purchase of Dana's Off-Highway Drive & Motion Systems business, which roughly doubles annual sales (second-quarter 2026 sales were $1.57 billion versus $0.81 billion a year earlier) and adds exposure to mining, construction, agriculture and energy equipment. The purchase was funded with about $1.2 billion of new term loan, a $300 million revolver draw and cash on hand; total debt rose from $2.9 billion at year-end 2025 to $4.1 billion at June 30, 2026, and cash fell from $1.5 billion to $0.4 billion. Because this is a different, more leveraged company than the one in the pre-2026 record, our valuation is anchored on what the transmission business has demonstrably earned, with the acquisition tested against the first two quarters of combined results. How we measure earnings. We start from cash generated by operations (which is already after interest paid), remove swings in receivables, inventory and payables, deduct stock compensation as a real cost, and deduct only the capital spending needed to maintain the plants. On this basis owner earnings per share ran $2.64 (2016), $3.86, $5.93, $5.50, $3.75 (2020 downturn), $4.62, $5.85, $7.71, $8.17 (2024) and $7.78 (2025). Owner earnings fell about 8% in dollars in 2025 ($719 million to $661 million) as North American medium-duty and vocational Class 8 truck demand dropped (North America on-highway sales fell 12%). Steady share repurchases cut the share count from 169 million to 84 million over the period; we do not credit buybacks as value creation. We anchor on the median of 2022-2025 legacy owner earnings, about $681 million, which covers a soft year and two strong years of the current business and excludes the pre-2022 period. The first two quarters of 2026 with the acquired business produced roughly $397 million of owner earnings, versus about $383 million in the first half of 2025, even after roughly $47 million more cash interest in the half. That is consistent with, but not proof of, a modestly higher level, so we set the level at $700 million a year (about $8.33 per share on 84 million shares) and move no further until more quarters are in. Note the Dana business's own history is not in the filings we reviewed, and the second-quarter 2026 report was not available in full, so 2026 figures rely on summary data. Base case, about $111 per share. Owner earnings are held flat at $700 million a year for 15 years, then decline 5% a year. Year-one growth: the actual 2025 change was minus 8%; we assume 0% growth from the anchor, because the first half of 2026 (10-Q filed August 5, 2026) shows owner earnings up about 4% year over year with the acquisition included. We credit no growth: no contracted backlog, price increases or defense growth is quantified in the filings, and the acquisition's promised synergies are management targets, not evidence. What supports flat durability is a demonstrated record: owner earnings never fell below $427 million in ten years including the 2020 downturn, and the business has supplied automatic transmissions for decades in vocational trucks and buses where lower-priced manual and automated-manual units do not fit. The fade after year 15 reflects the gradual shift toward electric drivetrains, which the company itself is addressing with hybrid systems for transit buses. Bear case, about $73 per share. On-highway volumes revert to 2020-2021 levels, and the acquired off-highway business (which serves cyclical mining, construction and agriculture markets) earns barely enough to cover the added interest, so owner earnings sit near $430 million for five years, recover only to $520 million through year 15, then decline 8% a year. This is built from named, evidenced risks: the 2020 trough of $427 million, the 12% North American on-highway decline in 2025, $4.1 billion of debt with covenants and refinancing risk, and integration costs the company itself flags. It does not assume the acquisition fails outright or a covenant default. Bull case, about $157 per share. Owner earnings start at $800 million (the first-half 2026 run rate for two quarters) and rise 2% a year for ten years, on price increases the company reported in 2025 and defense sales up 26% that year, then hold flat for ten years before declining 4% a year. We left out any market recovery, synergy targets and new-product wins because none is contracted or already delivering. Margin-of-safety price. The margin-of-safety price is about $70 per share, roughly 37% below the base case and slightly below the bear case: the business is cyclical, now carries about $4 billion of debt after a large, unproven acquisition, and the price allows a margin against the downside. What could make this wrong: the acquired business proves to earn materially less than the interest cost of buying it; a second year of falling truck demand; faster electrification of medium-duty trucks; or refinancing at higher rates. One item we could not fully reconcile: the cash-flow line 'other assets and liabilities' has been a steady $25-30 million a year outflow which we have treated as working capital and removed, which slightly raises owner earnings.