Oshkosh is Worth a Deeper Look

By Brian Shaw - July 31, 2012 | Tickers: CAT, LMT, NAV, OSK, TEX | 0 Comments

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Oshkosh Corp. (NYSE: OSK) ranks #337 on the Fortune 500 list for 2012, yet I bet many investors have never heard of it.  And before you start guessing what Oshkosh does, they do not make children’s clothing!  While based in the same city in Wisconsin, the "Oshkosh" you may have been thinking about is a subsidiary of Carter’s Inc.  This Oshkosh is a manufacturer of specialty vehicles, which may not sound exciting but is extremely profitable. 

What Is a Specialty Vehicle?

Oshkosh’s biggest segment is its defense business, where it is a leading producer of mine-resistant ambush protected (or “MRAP”) vehicles.  These armored vehicles, ranging from armored ATVs to tankers, drove tremendous revenue that peaked at $7.1 billion in 2010 at the height of a massive government contract won by Oshkosh; 2011 revenue dropped to $4.4 billion, which is by no means a small number.  Access equipment, Oshkosh’s second largest segment, includes heavy machinery such as aerial lift platforms and other lift, towing and recovery equipment and generates over $2 billion a year in sales.  Additionally, Oshkosh makes emergency equipment including fire trucks and snow plows.  Finally, Oshkosh manufactures commercial vehicles such as cement mixers, garbage trucks and other customized vehicles.  Here’s a breakdown of Oshkosh’s revenue in 2011 and YTD 2012 to give a visual perspective of the size of each segment and the changing revenue mix:

 

With further declines in defense revenue on the horizon as contracts are completed, the health of Oshkosh's other segments becomes a focus as we look at Oshkosh's future. 

Recent Performance

Oshkosh announced its fiscal third quarter results on July 26 and was rewarded with a 14% increase in share price.  Behind this jump in the stock was a solid quarter -- revenue grew 8% to $2.18 billion, while EPS rose 11% to $0.82 per share.  Additionally, management reaffirmed and/or increased full-year guidance relating to each of its segments, highlighted by an estimated 40% increase in access equipment sales.  That was well ahead of analyst expectations, which brings me to an interesting point.  According to Yahoo! Finance, here’s how analysts have fared in estimating Oshkosh’s earnings over the past year:

Not even close, right?  As discussed below, Oshkosh is frequently misunderstood and likely mis-valued by the investing community.

Competition

Oshkosh has some intense and diverse competition.  On the access equipment and commercial vehicle front, Oshkosh competes directly with a large number of companies ranging from smaller players such as Terex (NYSE: TEX) to huge companies such as Caterpillar (NYSE: CAT). The company’s defense segment competes with a range of defense contractors including Lockheed Martin (NYSE: LMT), Navistar (NYSE: NAV) and many others.  Here’s a quick comparison of a few financial metrics for these companies:

Risks

There are definitely risks facing Oshkosh.  For starters, the competitors noted above are just the tip of the iceberg.  As a small player, it is no easy task to continuously compete against companies like Caterpillar and Lockheed Martin.  Continued success against these competitors requires constant improvement in vehicle designs, quality and efficiency. 

Another huge risk facing Oshkosh is the economic environment.  Defense and emergency vehicle sales are heavily dependent on government budgets, which are currently under significant strain.  To further grow the access equipment segment, Oshkosh is faced with a construction industry around the world that has not recovered (and is still slowing in some places).  These are some serious pressures facing a company that generates an operating margin of only 4% that is also facing an expected decline in defense sales as the largest portion of the company’s large MRAP contract wraps up.

But Wait… There Are Opportunities!

While the competitive and macroeconomic situation that Oshkosh finds itself in is challenging, there is no reason to lose hope.  Oshkosh has been in the specialized vehicle business since 1916 and has competed successfully for a long time.  Over the past 20 years, Oshkosh shareholders have been rewarded with returns of over 1,700%, which absolutely crushed the S&P 500 over that time.  Government budget constraints will put pressure on Oshkosh and its competitors, but the essential nature of Oshkosh’s products insulates it from some budget cuts.  Plus, Oshkosh has reached out to international markets to expand its revenue base, as evidenced by the recent agreement to sell 750 MRAP vehicles to the UAE government.

The real opportunity for Oshkosh resides in its ability to weather the current storm.  With a strong cash position and just $1 billion in debt (down from $2.7 billion in 2008), Oshkosh is a healthy company that appears on the brink of reinstating its quarterly dividend.  When the economic situation improves, Oshkosh will be ready with a diverse product line that is poised to benefit from an upward move in the construction cycle.  

This is where I think analysts continue to misunderstand Oshkosh -- like larger cyclical companies such as Caterpillar, Oshkosh stands ready to benefit significantly from a boom in the construction cycle.  Based on today's prices, analysts aren't giving Oshkosh very much credit for this upside potential since it is likely more than a few quarters away from materializing.

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