After Icahn: Is Oshkosh Set for a New 5-Year High?

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On April 1, Oshkosh (NYSE: OSK) set a new 52-week high of $42.66; that is roughly a month before the company announced its fiscal 2013 second quarter results. That price is just about $2 away from its current 5-year high of $44.57 set on April 23, 2010. Oshkosh is a special vehicles company based in Oshkosh, Wisconsin. The company faces competition from Terex (NYSE: TEX), its largest direct rival, Federal Signal (NYSE: FSS), and a privately held BAE Systems Land & Armaments.

Oshkosh was the subject of a hedge fund boardroom war with activist investor Carl Icahn in 2012. However, the value investor did not manage to engineer a takeover, which he would have used to spin-off JLG, a subsidiary of the trucks and government vehicles manufacturer. Oshkosh acquired JLG, a manufacturer of lift equipment for use in all industries, in 2006 for $3.2 billion.

The activist investor was pushing for a $32.50 per share takeover, which the company’s shareholders threw out the window, terming it underwhelming. Oshkosh had indicated that he never intended to sell or liquidate the company’s other lines of business, which include military trucks, fire trucks and construction-related vehicles. Nonetheless, shareholders must now be smiling to see the company trading 19.78% to the upside of what the activist investor offered. 

Additionally, the signs are promising for Oshkosh, as it recently received a $192.8 million deal from the Pentagon, which will see it supply and maintain fire trucks for the government unit up to 2018. The private construction boom is also set to guarantee a continuous stream of income, with predictions that the industry should continue growing by about 9-12% for the next two years. This growth rates have the capacity to sustain Oshkosh’s current rally, to the point of setting a new 5-year high and beyond.

Highlights from FQ2 results

Oshkosh beat the earnings estimate of $0.86 by a massive $0.11 per share after reporting EPS of $0.96. This represents nearly a 132% increase from last year’s FQ2 EPS of $0.47. However, the company’s revenues came short of analyst estimates, after falling 3.8% from the amount reported in FQ2, 2012. However, operating income increased from last year’s $84.1 million to $134.6 million, representing a 60% growth.

Oshkosh’s defense segment sales continued to deteriorate as they fell by 16.2% from last year. The segment results also included $1.4 million of net charges related to workforce reductions in that segment. However, improved sales mix, including the ramp up of sales of M-ATV units to the UAE and improved operational efficiencies reduced the impact of the segment’s huge decline. Following this massive decline in the defense segment, Oshkosh CEO David M. Sagehorn said:

“In our Defence segment, we're reducing our estimated sales range for the year by $100 million to a range of $3.1 billion to $3.2 billion. The reduction in our sales estimates is largely the result of the decrease in our estimate of after-market sales, some of which we expect to be driven by sequestration, as well as some vehicle sales shifting to 2014.”

Current opportunities

In a recent survey by Bloomberg, construction spending rose by 4.5% in the 12 months ended April 30. According to the survey, private projects were up as compared to the decline reported in public spending. The Commerce Department reported that outlays increased by 0.4% to $860.8 billion in April. On the other hand, private construction rose by 1% in April from the previous month, representing the highest spending since December last year. However, public projects were down 1.2%, which followed last month’s decline of 2.9%, thereby subjecting the sector’s spending to its lowest level since October 2006.

Sales of new properties also rallied 2.3% to a massive 454,000 homes in April, in what the Commerce department noted as the second fastest since July 2008. This pace is expected to continue for the near future, unless something out of the ordinary happens. Russell Price, senior economist at Ameriprise Financial in Detroit, told Bloomberg, “Unless we get a jump in interest rates for some unforeseen reason, which I do not expect, I do think it is a solid path higher for the sector.”

The progress made in the construction industry could help Oshkosh complement the decline in sales made from the defense department. According to Sagehorn, construction spending is expected to continue growing and this should boost the company’s sales. “Our sales growth in this region over the last several years in the access equipment segment has been largely replacement demand-driven. With any significant uptick in non-residential construction spending, we do expect to see some fleet expansion,” Sagehorn said during a presentation in May.

Oshkosh has recently, been awarded a deal with the Pentagon whereby the special vehicles manufacturer will pocket $192.8 million worth of fire trucks. The completion of the project is scheduled for May 29, 2018. During this period, Oshkosh will also be in charge of support and sustainment services of the new vehicles. This should further boost the company’s revenue from government units overall.

Valuation

Oshkosh currently trades at a 12.35 P/E, as compared to its fierce rival Terex, which has a P/E of 36.02, nearly tripling that of the Wisconsin-based company. Both of these companies’ quarterly revenues fell from last year, with Terex’s declining by 5%. However, the underdog Federal Signal out-shined the two giants as it reported a growth of 2% in revenues. The $561.92 million market cap company has a training 12-month revenue of $806.9 million, as compared to its counterparts, Terex $7.25 billion, and Oshkosh $7.98 billion.

Oshkosh trails the duo in terms of gross margins, with just 13% compared to Federal Signs’ 24% and Terex’s 20%. Consequently, the company’s operating margins for the trailing 12-months lag behind, though slightly, its rivals, at 5% as compared to 7% and 6% for Federal Signs and Terex respectively. Nonetheless, the company’s recent quarter operating margin of 6.8% indicates an improvement from the previous three quarters.

However, in terms of valuation and including earnings growth rates, Oshkosh stands out with a PEG ratio of just 0.73, as compared to Terex’s 1.33, and Federal Signs’ 2.11. Additionally, the company has indicated projected cuts in capital spending, which should improve cash flows going forward.

The bottom line

At about 87% upside from 12 months ago (Jun 4, 2012) Oshkosh may seem to have reached its limit. However, the most important thing to note here is that the company achieved part of this performance at the center of boardroom wars between activist investor Carl Icahn and the company’s shareholders. This tussle has since been swept away as the shareholders ultimately rejected his bid in December. The impact has been witnessed following the company's YTD rally of 23.27%.

Additionally, in comparison to last year, Oshkosh has reported improvements in several areas. The decline in revenues, which was hugely due to the fall in defense unit sales, was a major downside. However, the company’s earnings and operating margins increased massively, something that is worth noting. Oshkosh is also competitively valued compared to its rivals, and therefore offers more value if it can maintain a positive outlook.

Furthermore, Oshkosh has already nailed a deal with the Pentagon, which could reduce the decline in sales from government units, while prospective growth in the construction industry offers a massive opportunity to grow revenues. With all these opportunities, there is no reason why Oshkosh should not trade beyond its 5-year high of $44.66 per share.

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Nicholas Kitonyi has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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