Comparing Allison Transmission (ALSN) and Federal Signal (FSS)

Allison Transmission (NYSE: ALSN) and Federal Signal (NYSE:FSS) are both auto/tires/trucks companies, but which is the better business? We will contrast the two companies based on the strength of their valuation, earnings, analyst recommendations, institutional ownership, dividends, profitability and risk.

Dividends

Allison Transmission pays an annual dividend of $0.60 per share and has a dividend yield of 1.5%. Federal Signal pays an annual dividend of $0.28 per share and has a dividend yield of 1.3%. Allison Transmission pays out 26.5% of its earnings in the form of a dividend. Federal Signal pays out 38.4% of its earnings in the form of a dividend. Both companies have healthy payout ratios and should be able to cover their dividend payments with earnings for the next several years. Allison Transmission has raised its dividend for 4 consecutive years and Federal Signal has raised its dividend for 2 consecutive years. Allison Transmission is clearly the better dividend stock, given its higher yield and longer track record of dividend growth.

Profitability

This table compares Allison Transmission and Federal Signal’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
Allison Transmission 16.34% 45.65% 8.34%
Federal Signal 5.30% 11.39% 5.64%

Institutional & Insider Ownership

84.1% of Federal Signal shares are owned by institutional investors. 7.9% of Allison Transmission shares are owned by company insiders. Comparatively, 4.2% of Federal Signal shares are owned by company insiders. Strong institutional ownership is an indication that hedge funds, large money managers and endowments believe a stock is poised for long-term growth.

Valuation & Earnings

This table compares Allison Transmission and Federal Signal’s revenue, earnings per share (EPS) and valuation.

Gross Revenue Price/Sales Ratio Net Income Earnings Per Share Price/Earnings Ratio
Allison Transmission $1.84 billion 3.17 $214.90 million $2.26 18.23
Federal Signal $707.90 million 1.78 $43.80 million $0.73 28.75

Allison Transmission has higher revenue and earnings than Federal Signal. Allison Transmission is trading at a lower price-to-earnings ratio than Federal Signal, indicating that it is currently the more affordable of the two stocks.

Analyst Recommendations

This is a breakdown of recent ratings and target prices for Allison Transmission and Federal Signal, as provided by MarketBeat.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Allison Transmission 2 7 5 0 2.21
Federal Signal 0 0 2 0 3.00

Allison Transmission currently has a consensus target price of $43.70, suggesting a potential upside of 6.04%. Federal Signal has a consensus target price of $20.00, suggesting a potential downside of 4.72%. Given Allison Transmission’s higher possible upside, equities analysts plainly believe Allison Transmission is more favorable than Federal Signal.

Volatility & Risk

Allison Transmission has a beta of 1.22, suggesting that its stock price is 22% more volatile than the S&P 500. Comparatively, Federal Signal has a beta of 1.3, suggesting that its stock price is 30% more volatile than the S&P 500.

Summary

Allison Transmission beats Federal Signal on 13 of the 17 factors compared between the two stocks.

Allison Transmission Company Profile

Allison Transmission Holdings, Inc. and its subsidiaries design and manufacture commercial and defense fully-automatic transmissions. The Company manufactures fully-automatic transmissions for medium- and heavy-duty commercial vehicles, and medium-and heavy-tactical United States defense vehicles. The Company’s transmissions are used in a range of applications, including on-highway trucks (distribution, refuse, construction, fire and emergency), buses (primarily school, transit and hybrid-transit), motorhomes, off-highway vehicles and equipment (energy, mining and construction) and defense vehicles (wheeled and tracked). The Company’s transmissions are sold under the Allison Transmission brand name and remanufactured transmissions are sold under the ReTran brand name. The Company has developed over 100 different models that were used in more than 2,500 different vehicle configurations and were compatible with over 500 combinations of engines, as of December 31, 2016.

Federal Signal Company Profile

Federal Signal Corporation designs, manufactures and supplies a suite of products and integrated solutions for municipal, governmental, industrial and commercial customers. The Company’s segments include the Environmental Solutions Group and the Safety and Security Systems Group. Its Environmental Solutions Group manufactures and supplies a range of street sweeper vehicles, sewer cleaner and vacuum loader trucks, hydro-excavation trucks and waterblasting equipment. The products are sold to both municipal and industrial customers under the Elgin, Vactor, Guzzler and Jetstream brand names. Safety and Security Systems is a manufacturer and supplier of systems and products that law enforcement, fire rescue, emergency medical services, campuses military facilities and industrial sites use to protect people and property. It offers systems for campus and community alerting, emergency vehicles, first responder interoperable communications and industrial communications, among others.

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