TheDumbMoney (65.06)

Oshkosh Corporation On My Watchlist

August 30, 2011 – Comments (4) | RELATED TICKERS: OSK , CAT , SPY

I read today that Icahn was a big holder of Oshkosh Corporation (OSK).  I don't know if you know what this company is (I didn't), but it's an old and major-though-second-tier heavy equipment maker.  They make a majority of their revenue from U.S. defense applications (armored vehicles, etc.), but also make garbage trucks, cranes/lifters, de-icing trucks, fire trucks, etc.  I looked it up and it has no dividend (it cut its $0.40/year divvy in Spring 2009, it's one of those), and a P/E of under 5, with a one-year forward P/E of around 9ish because it's going through some hard times right now.  It's clearly a cyclical industrial stock.  The 3-year beta is 2.5.

So anyway, the big negative news is their mis-bidding on their major $3 billion defense contract, on which they are apparently going to lose money for a few years, and the general threat of major defense cuts as a result of the upcoming budget deals, and potentially greater contraction if one assumes we:  a) have a major national debt problem; and b) the solution will be found in cuts to defense companies like what this one largely though not exclusively is.  So that's the pessimism.  A lot of it's probably justified.  And expressed in the stock, which is down 50% from its 2/14/2011 high of 2011.  The first time the stock ever hit the level it is at today was August 2003, and the highest it has ever traded was around $65/share in, of course, July 2007. 

I ran a discounted cash flow analysis on this stock by plugging the numbers into my handy-dandy excel spreadsheet that I created for myself a year and a hald ago. 

This is the result:  even after today's 6% stock rise, to justify the current valuation of this company, one has to plug in assumptions roughly like the following, from the starting point of the $537 million in FCF it earned for the year ending 9/2010, and assuming a very conservative 15% discount rate:

1)  FCF will decline 16% per year, for ten straight years, then decline 2% per year in perpetuity.

2)  FCF will decline 17% per year, for ten straight years, then never grow. 

Now obviously one can fuss with the numbers.  One can plug in a couple of big years here and there.  One can do five years of much stronger decline followed by growth.   But this is the upshot:  to pay for itself at this price and at this market cap, you just need to find $1.817 billion in combined current and discounted future free cash flow, somewhere.  And the company earned $537 million last year alone.  

Easy boy, down, sit.  

On the other hand, it's clear from looking at the cash flow statement that FCF was juiced in the last two years:  investments in property were much, much lower than depreciation/amortization, which as I understand it is not sustainable -- we're talking off by 50%.  And net income was at an all-time cyclical high last year, and we know it's already declining.  So, once again, now starting with a $200 million FCF for this past year, which I just made up for the reasons above, the stock under that starting assumption pays for itself with about 6% FCF growth per year for ten years, and never growing again.

As usual, a discounted FCF analysis raises more questions than it answers.  But Icahn is a smart dude, not as smart as Buffett, but smart, smart, smart.  And this one looks undervalued to me, and I'll be keeping an eye on it to see if it shoots up.  It's a bit too risky for my blood right now, which may be why I'm not Carl Icahn....  From a technical perspective, which I'm trying to at least glance at, there is at least an indication that it has formed at least a short-term bottom, and if it goes above $21/share or so that's likely a bullish sign (until some other sh!t hits the fan at least, which is my problem with technical analysis).  One other thing to note is that in December comes and the Congressional Special Committee finds a way to deflect the currently-anticipated defense cuts onto some other loud and sacred cow, this is a very likely candidate stock to make a huge move upwards at that time. 

Third Quarter Results

Anyone know anything else about this company?