Oshkosh Corporation (OSK)

WeeValue (54.27) Submitted: 3/10/2008 12:49:11 AM : Start Price: $36.99 OSK Score: +13.17

Oshkosh Corp

Oshkosh Corp (formerly Oshkosh Truck), manufactures a variety of vehicles and lift trucks in the commercial, fire and emergency and government areas. Specifically, in the commercial segment OSK manufactures waste disposal equipment, concrete mixers and tow trucks. In the municipal segment, they manufacture fire trucks, ambulances and snow removal trucks, amongst a few others. In the government sector OSK manufactures a variety of defense oriented heavy duty trucks and equipment - including a recently awarded “Mine Resistant Ambush Protected” vehicle for the Marine and Army. In December of 2006, Oshkosh purchased JLG industries – a global manufacturer of aerial work platforms and telehandlers (those big forklift like trucks with a long telescoping boom).

Interesting Information:
The company was founded in 1917 – so it’s been around for a while. It has largely been focused on the defense business. In September 1996, Oshkosh began an initiative to expand while shedding non-performing assets. Over the past 11 years, they have grown significantly by acquisition.
Although Insiders control only 1% of shares, the current CEO Robert Bohn controls over 360,000 shares valued at just shy of $14 million. The Chief Operation Officer Charles Szews controls approximately 155,000 shares valued just shy of $6 million.

The Bear Case:
One of the large fears with Oshkosh is that we are about to enter a recession which will reduce capital spending by companies and municipalities. This could crimp earnings.
Additionally, OSK has some red flags I don’t like to see on the balance sheet: High levels of goodwill and high debt. Given the number of acquisitions, and the size of the JLG purchase, the cause of the goodwill is clear. However at 2.5b goodwill is by far the largest item in the asset category. Additionally, if you lump in the intangible assets – you get 3.6b compared to a shareholder equity of just 1.4b. Not a ratio I like to see. Until the purchase of JLG, OSK had carried little long term debt. To finance the JLG purchase, OSK has added significant leverage (while almost doubling revenue).

The Bull Case:
For me, all roads lead to Oshkosh. Let’s start 12 years ago or so, when I interviewed for a position at JLG. I elected not to take it, although I didn’t know it at the time, their cost conscious operation really made an impression on me. I don’t know if it’s the same, by using the words “spare” to describe the office environment would be flattering. If their numbers were any indication, the cost consciousness lasted a good long time. Several years ago, fondly remembering my interview experience, I started investigating JLG. I liked what I saw – if I remember correctly, they had excellent ROE and ROIC metrics. Before I could buy, they were purchased by Oshkosh. Similarly, while investigating another favorite – Miller Industries (see previous write up), I was impressed to see that one of their key competitors was Jerr-Dan, owned by – you guessed it – Oshkosh Truck. So it seems to be fate that keeps bringing me back…
In addition to the forces of the universe working on me (I can imagine that won’t have quite the same relevance for the readers of this document), there are lots of things I like about OSK:
• Copious free cash flow – both before and after the JLG purchase
• Impressive 5 yr average ROE of 20+%
• Good 5 yr average ROIC of 12%
• Diverse product range that should help protect against poor performance in any one market segment.
• Both domestic and international operations
I think the FCF and high returns on capital should allow Oshkosh to strengthen its balance sheet over time. They are projected to put $300-400m towards debt repayment this year. At that rate, they should be able to retire much of their debt in the next 3-5 years as they digest (I mean integrate) the JLG purchase – and that without achieving any “synergies”
Additionally, although the insider ownership is low, both Bohn and Szews combined have about $20m in stock on the line.
One of the most compelling reasons in the bull category is the valuation. I calculate about $3.00 in FCF per share. Analysts are pegging a growth rate of 22%, which I think is very aggressive. So running a range with growth at 10% as a lower bound and 20% at the upper bound, I get a valuation of $52 – 105 per share. What good is a valuations range from 52-105? Channeling Warren Buffett, I’d say a lot given that the stock currently trades at $38.40. This is minimally a 35% discount to our current price.

Final Thoughts:
It’s not often that you can buy a quality company with staying power at such a low multiple – about 10.9X earnings. Oshkosh hasn’t traded at a multiple lower than this since 1998-2000 when everyone was chasing… well you know what we were chasing. The debt and goodwill is concerning. But OSK has shown that they can integrate companies – they’ve been doing it since 1996. To a large degree, I think the smaller acquisitions they have taken on were a warm up for the JLG merger. Given their success on the smaller scale, and knowing the profitability of the acquired company, I think the odds are high that they can make this a success and reward shareholders over the long term.

Disclosure: I do not own shares of OSK… yet.