Insufficient Growth At Allison Transmission Holdings, Inc. (NYSE:ALSN) Hampers Share Price

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider Allison Transmission Holdings, Inc. (NYSE:ALSN) as a highly attractive investment with its 8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Allison Transmission Holdings has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Check out our latest analysis for Allison Transmission Holdings

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If you'd like to see what analysts are forecasting going forward, you should check out our free report on Allison Transmission Holdings.

Is There Any Growth For Allison Transmission Holdings?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Allison Transmission Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 4.6% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 218% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings growth is heading into negative territory, declining 1.4% each year over the next three years. With the market predicted to deliver 12% growth per annum, that's a disappointing outcome.

With this information, we are not surprised that Allison Transmission Holdings is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Allison Transmission Holdings' P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Allison Transmission Holdings' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Allison Transmission Holdings, and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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