Engines Revved for the Allison IPO

NEW YORK ( TheStreet -- Cloud and social networking companies have been the big winners in the IPO market over the past year, but this week's hottest offering is a good old truck-parts company: Allison Transmission ( ALSN).

Allison builds automatic transmissions for heavy-duty vehicles and was picked up from General Motors ( GM) in 2007 by private-equity firms The Carlyle Group and Onex.

IPO Desktop President Francis Gaskins expects that it will be an institutional favorite and says it's a buy on the offering, even if it prices at less than the proposed range of $22-$24 a share.

"It most likely will not 'pop,' but it's a good longer-term hold," Gaskins said.

For comparison, another former GM company, Delphi Automotive ( DLPH), went public in November 2011 and priced its shares at $22. The stock slid to $19.22 but is now trading at more than $31, meaning it's up nearly 45% from its IPO price.

Allison is completely separate from GM, but investors should be aware that GM's actions could affect Allison.

For example, GM gets to use Allison's brand name on its trucks without paying royalties, but if anything goes wrong with those trucks, Allison's reputation could suffer.

There are also noncompete agreements between the two companies that expire in Europe this year and elsewhere in 2017. For now, Allison doesn't expect GM to try to compete against it.

Allison also has a leading position in the energy sector with pumping equipment and well-servicing rigs. It has benefited from increased demand for natural gas drilling.

Customers include Halliburton ( HAL), Weatherford International ( WFT) and National Oilwell Varco ( NOV).

In addition, Allison provides heavy-duty transmissions used in mining trucks, which has been one of the few sectors to see job growth.

Its competition in this arena is Caterpillar ( CAT) and Komatsu.

Allison is also delivering fuel-efficient hybrid transit buses and accounts for 80% of all the units sold in North America in 2011. Municipalities and states have been able to use government subsidies to make these purchases as they look for ways to save money as fuel costs rise.

Allison is highly leveraged, with a price-to-book ratio of 5.3. However Delphi's price to book value is 6.2.

In the road-show materials, management says it has reduced debt by $1.1 billion since the acquisition in 2007. Free cash flow has climbed to 17% of sales while capital expenditures are only 4.5% of sales.

Allison is expected to pay a dividend in the June quarter of six cents a share. That would be a payout of 1% if the shares price at $23.

The company is looking for growth in the global economic recovery and capitalizing on rising demand for energy and commodity products. It also has its eyes on emerging and underserved markets.

Allison's will be a $500 million offering with 100% of the proceeds going to The Carlyle Group and Onex. The two companies bought it for $5.6 billion in 2007.

Toronto-based Onex has made its name by taking high-cost manufacturing businesses and turning them into low-cost suppliers.

Allison has a market value of $4.2 billion, but subtracting the tax savings of $1 billion, that comes down to $3.2 billion.

Gaskins isn't as impressed by the semiconductor company M/A-Com Technology ( MTSI), which is hoping to raise $100 million in its offering and pricing shares between $17-$19.

Its products are used in automotive, industrial, medical, mobile and scientific applications. Like many semiconductor companies, M/A-Com was affected by the flooding in Thailand this past year.

Its revenue has stayed in a range of $78 million and experienced an 8% drop from September to December.

"Although MTSI is in growth markets, it hasn't shown much sequential quarterly growth over the past six quarters. Therefore, we would pass on the MTSI IPO," said Gaskins.

Elsewhere, cloud-focused IPOs have performed very well in the aftermarket. The latest to throw its hat into the ring is Demandware ( DWRE), which looks to raise $74 million and price its shares between $12.50 and $14.50.

Demandware provides software solutions that help companies design and manage their own e-commerce sites. It gives its customers a seamless approach to reach their customers digitally across Web sites, mobile applications and digital stores.

Demandware has seen its business grow from 19 e-commerce sites in 2007 to 361 in 2011.

Customers include Crocs ( CROX) and Jones Apparel Group ( JNY).

Because cloud-based companies have done so well, Gaskins believes Demandware will also see its shares rise after going public.

However, he is concerned that of the past six quarters, Demandware has logged only two profitable ones. That said, the December quarter's revenue was up 38% over the September quarter's.

"A very good sign is that subscriptions or the recurring revenue accounted for 88% of revenue," Gaskins added.

-- Written by Debra Borchardt in New York.

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