An Opportunistic Play on an Improving US Housing Market
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Carl Icahn, the famous activist investor, once offered to acquire Oshkosh Corporation (NYSE: OSK) at $32.50 per share, with a total deal value of $3 billion. However, the company’s board rejected the offer, as they thought the offer undervalued the company. Indeed, after reporting strong 2013 first quarter earnings results, Oshkosh’s share price just surged by nearly 19% in one trading day to more than $41 per share, 26% higher than Icahn’s offer.
A Growing First Quarter
In the first quarter 2013, Oshkosh generated $1.76 billion in revenue, 6.1% lower than the first quarter last year. The decline in revenue was due to the decrease in defense segment sales. The net income was $46.2 million, an 18.8% year-over-year growth compared to $38.9 million in the first quarter last year. EPS has grown from $0.43 last year to $0.51 this year. The largest operating income contributor was the Defense segment with $60.9 million. The Access Equipment segment ranked second, with $48.9 million in operating income. In the first quarter 2013, Oshkosh generated $39 million in free cash flow. The company spent more than $125 million repurchasing around 4.25 million of its own shares in the market. This recent share buyback was part of the plan to repurchase $300 million of the company’s common stock in the period of 12 – 18 months. Charlie Szews, Oshkosh’s CEO, said: “We started the year strong with results that exceeded our expectations as we continued to execute our MOVE strategy. MOVE provides a clear roadmap and targets for delivering shareholder value, and the Oshkosh team is working diligently to deliver against that roadmap.” He confidently raised the full-year outlook for adjusted diluted EPS to a range of $2.80 - $3.05. At the current trading price of $41 per share, the market is valuing Oshkosh at 13.4x – 14.6x forward P/E.
Unlock Oshkosh’s Hidden Value
Carl Icahn saw the hidden value of Oshkosh in its lifting equipment subsidiary, JLG. Seven years ago, Oshkosh acquired JLG for $3.1 billion in cash. Recently, JLG generated $716 million in fourth quarter revenue and $60 million in operating profits. JLG’s revenue for the full year reached $2.92 billion. Thus, the $3 billion for Oshkosh including JLG seemed to be a quite sweet deal for Carl Icahn. He thought that the company’s hidden value would be unlocked by spinning off JLG and selling the military-truck business. As the US government cut spending, the military business would face a sales decline in the coming years. However, Oshkosh reported that it was awarded around $800 million worth of Defense Department contracts in the first quarter. JLG business, which was tied to construction activity, was quite cyclical in nature. The improvement in the overall US housing market would benefit the business in the near term.
Cheapest Among Peers
Even with the recent significant rise in the share price, Oshkosh is still the cheapest company among its peers, including Federal Signal Corp (NYSE: FSS) and Terex Corporation (NYSE: TEX). Oshkosh is trading at around $41 per share, with a total market capitalization of $3.76 billion. The market is valuing the company at nearly 8.5x EV/EBITDA. Terex’s share price has also increased by 12.7% to $32.05 per share in one trading day. With $3.54 billion in market cap, Terex is valued at 8.8x EV/EBITDA. Federal Signal, the smallest company among the three, has the most expensive valuation. At the current trading price of $8 per share, Federal Signal has a total market capitalization of nearly $504 million. The market is valuing it at 10.23x EV/EBITDA.
The improvement in the US housing environment might benefit Oshkosh in the near future. Thus, Oshkosh might be considered an opportunistic play on the US housing market. It shouldn’t be a long-term holding, as both the military truck and lifting equipment business are cyclical in nature.
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