Oshkosh Corporation (OSK) is a manufacturer of access equipment, defense vehicles, commercial vehicles, and fire and emergency vehicles. While many investors may not realize it, chances are they see an Oshkosh vehicle every day. The company has market-leading positions in each of the segments it operates in. With shares trading less than 10% from their 52-week high, we review if shares are still a buy.
Oshkosh was founded in 1917 as the Wisconsin Duplex Auto Company. With a beginning in rugged four wheel drive vehicles, the company later expanded into concrete trucks and other equipment that would set it on the path to become the conglomerate in heavy duty trucks that it is today.
With a leading market position in each of the operating categories it sells vehicles in, the company is well known and respected among its peers.
Source: Investor Presentation
The company makes tow trucks, concrete mixers, fire trucks, garbage trucks, airport machinery, and even aerial lifts. Its name has become synonymous with quality vehicles and this has helped it to expand its presence in the community. Once it wins a contract for a fire truck for a particular fire house, it tends to keep the customer for a long time into the future, selling them their next truck. The same with airports, waste operators, towing and recovery companies and so on. Most operators in the industry tend to stick with the brand they love and know, and as the market share shows, it’s Oshkosh.
Oshkosh made its last large acquisition in 2006 when it acquired JLG, an aerial platform maker for $3 billion. This of course was right before the Great Recession and put the company in a financially weak state.
Source: Oshkosh Investor Relations
However, the company made it through the recession and came out strong. With most of its sales coming from the United States, it is a great way to invest in a company that benefits greatly during economic booms. The risk stems from the fact that 48% of sales come from access equipment, which is tied very heavily to the construction industry. If this side of the business were to see a 50% drop in demand, then revenue for the company as a whole could shrink by a quarter or $1.9 billion. The other segments are of course economically sensitive, but the need for a new fire truck, tow truck, or garbage truck is dependent upon the businesses in which they serve to actually operate. If they have trucks constantly breaking down, it would cause a higher cost of operation than simply purchasing new ones.
The company generating most of its sales from the United States is attractive as it will not have to fight currency fluctuations and will be protected from many of the possible tariffs for exporting. The exception being of course that input costs could rise on the manufacturing side.
Oshkosh recently reported a strong second quarter, beating on both the top and bottom lines.
Source: Seeking Alpha
The company not only beat estimates, but also raised its full-year forecast. Management increased 2019 earnings per share guidance to a range of $6.90 to $7.40 and adjusted earnings per share estimate in the range of $7.00 to $7.50. This should be supported by the company’s backlog which grew to $5.85 billion. Much of this growth came from the win of a defense contract that led to a $1.7 billion dollar order.
Source: Earnings Slides
Further more the picture is better painted below.
Source: Earnings slides
Oshkosh was led by a strong demand in access equipment as sales increased 31.6% to $826.5 million for the quarter. Defense saw a decrease of 6%, and fire saw an increase of 29%. Another weak spot was commercial, which saw an 8% decline in revenue but growth in the segment’s backlog.
Next we take a look at the balance sheet to get an idea of the current situation with finances.
The company saw a decrease in cash for the quarter. Part of the cash was used to repurchase $170 million worth of shares in the quarter. This helped improve earnings by a whopping $0.08 per share.
Such strong growth is a great thing to have, but it can create a sort of high quality issue. This is important to recognize as a risk going forward. With such demand and a large backlog, customers may get impatient and take business to competitors. It could also leave Oshkosh ramping up production and creating inventory right before the end of an economic boom. This would leave the company in a position where it would have to lower prices. While this may not be an issue anytime soon, it is something to keep an eye on. Additionally, management mentioned that trade policies and increased commodity costs have caused it to pay significantly more for its raw materials. However, because orders in backlog at the time the surcharges were implemented are not subject to the surcharges, the company will not fully offset price increases. Management is staying active, and we can only hope the trade issue will resolve any further pressure. For investors it may be offering the opportunity for shares to be accumulated at an attractive valuation.
Oshkosh currently trades at a premium to peers.
However, this is a discount to its historical valuation and should be noted that the company is operating better than peers at the moment. With diversity in product offerings Oshkosh may be a better investment in a cyclical industry.
The company currently trades at one of the lowest P/E and forward P/E ratio’s in the last 5 years. The company is arguably in a much stronger position now, and one would believe it would perhaps be trading at a higher valuation. With a higher earnings yield and lower debt/capitalization ratio around 25%, investors should find more confidence in Oshkosh now.
Using our DCF calculator, we further see shares are trading below fair value.
Source: Money Chimp
With earnings for the last 12 months of $5.81, we estimated the following. Earnings would be slated to grow at a fair rate of 7% for the next 3 years, followed by 5% thereafter. This would leave us with a DCF value of $132.02 or approximately 71% higher from current prices. This is a greater discount than the last time we reviewed Oshkosh.
For investors looking for a way to benefit off of the strong economic growth the United States is experiencing, Oshkosh offers an attractive value. The company is trading at a low P/E and has a backlog to sustain its business in the medium term. Investors can own a piece of a company whose products they see every day, while benefiting from the strong prospects it has to offer. While shares trade near their 52-week low, the market has left Oshkosh behind on its stretch to new highs. Any accumulation under $80 a share offers investors a healthy return as shares work their way to the DCF value. The company has existed through many economic cycles in its existence for the past 101 years and will continue to survive. However, should the economic situation change, then another analysis of the company and shares would be necessary.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.