Oshkosh Corporation (OSK)

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.

I had the pleasure of driving Oshkosh trucks during my stint in the U.S. Marine Corps. Despite all the abuse we heaped on them they never stopped running. Those trucks were bulletproof, just like the company. OSK earnings are driven by the North American specialty truck market which at the moment is strong. Expect a benefit from additional defense spending. The company has a successful track record of acquisitions. The latest acquisitions for Oshkosh were,

AK Specialty Vehicles, purchased from Healthtronics on July 31, 2006 for an all cash transaction of $140 million.

Iowa Mold Tooling Co. on August 14, 2006 for an all cash basis of $131 million.

For much of its early history, Oshkosh Truck was an undiversified manufacturer of heavy tactical vehicles for the military. Beginning in 1996, the company embarked upon an aggressive series of acquisitions enabling diversification into the commercial and fire/emergency truck manufacturing business. In its current incarnation, Oshkosh Truck produces aircraft rescue, firefighting, and municipal snow removal vehicles, ambulances, wreckers, concrete mixer systems, refuse and waste transfer haulers, truck-mounted cranes, and heavy and medium-payload tactical military trucks. These vehicle brands are well regarded within each individual industry. Acquired businesses such as Pierce, McNeilus, Medtec, and JerrDan are viewed as embodying a certain degree of quality and reliability. The most recent acquisition of JLG Industries in 2006 added aerial work platforms and telehandler vehicles to the evolving product portfolio.

Perhaps rather wisely, Oshkosh has found it necessary to diversify its earnings base.
Clearly, the loss of a critical military contract, which can be imposed by the government without notice, would be quite injurious to the company’s earnings. In the hypothetical sense, the military could actually find it necessary to greatly reduce the number of ground-based vehicles in combat or training in favor of other modes of transportation such as those through the air or water. The strategies of combat, based on knowledge of historical warfare, certainly manifest change. The fear of suffering a great diminution of earnings compelled Oshkosh to acquire non-military businesses. The company was clearly successful in this regard. Defense-related income is no longer the dominant feature of its earnings. However, the acquired companies of the last decade are clearly cyclical. The majority of the Oshkosh earnings then will depend on the state of the commercial and residential construction industries as well as the health of state municipalities. Rather than achieving linear earnings consistency, which generally is the objective of diversification, Oshkosh will most likely suffer great earnings volatility.

Financials
The expansion of the Oshkosh earnings has been more subtle simply because it has been increasing its earnings base through non-defense/military acquisitions. There has, however, been a marked improvement in the profit margin and return on equity. It is not entirely clear, due to the velocity of acquisitions over the past decade, to what degree margin expansion has been achieved through either astute acquisitions or increased military order backlog. In any event, the profit margin has expanded from the 3.4% level in 2002 to 6% in 2006. The ROE has also increased by nearly 500 basis points, or by
33%. It is important to note that the most recent acquisition of JLG created a highly leveraged balance sheet such that a higher ROE might be expected.

It is observed that Oshkosh has greatly improved its earnings profile from modest profitability one decade prior. It does not appear that this accomplishment can be entirely attributed to the level of defense backlog. In 1998, defense income represented roughly one third of total company operating income. A gradual improvement appeared during the years of 2003-2005, in which orders for its military vehicles increased dramatically.
However, at the moment, defense income contributes 37% of income.
Since Oshkosh did not acquire any defense related businesses during 2003-2007, it is reasonable then to assume that certain operating efficiencies have been achieved within the commercial and industrial aspects of its business. However, it also might be presumed that these cyclical businesses are experiencing or, have experienced, a period of peak earnings. The cyclicality of commercial vehicle and equipment production can be observed in the JLG financial statements. Prior to the recessionary conditions of 2001,
JLG realized a ROE of 28% in 1999. During the years 2001, 2002, and 2003, the respective ROE was 11%, 4%, and 5%. In 2006, or the year in which Oshkosh consummated this acquisition, the ROE once again had expanded to 26%.

In the absence of any substantial debt reduction, a loss of defense earnings will disproportionately cause a decline in net income. Rather importantly, defense income has expanded from $41 million to $231 million, or by 460%, since the beginning of the Iraq war

Valuation
Defense income, which is the earnings feature with questionable sustainability, represents one third of the company’s income. The balance of the earnings base is represented by pure cyclical businesses. Either of these sources of income, either individually or combined, if in decline mode could, cause the Oshkosh earnings to become problematic.
However, the earnings impact would actually be enhanced by the company’s obligation to service its debt. Any loss of revenues would result in a disproportionate loss of after-tax earnings. Based on the earnings estimates for the company in the 2008 fiscal year, Oshkosh trades at a P/E ratio of 12x. If this forecast is achievable, Oshkosh will generate $347 million of net income. On a pre-interest and tax basis, based on $236 million of run-rate interest expense, operating income might be $770 million. In 2002, Oshkosh reported $41 million of defense-related income. Let us assume, since no acquisitions were made so as to interfere with this calculation, that this level of earnings is normal for the company when the U.S. is not engaged in war.

Annualized defense income might be $230 million in 2007 and, assuming a 10% growth rate as expected by the company, the figure might be closer to $253 million by 2008. If
2002 is an accurate reflection of a normalized earnings environment, and then the potential loss of income would be $212 million ($253m - $41m). In relation to $770 million of anticipated EBIT in 2008, the adjusted figure would be $558 million. Less $236 million of interest expense, pre-tax profit would be $322 million or $209 million after taxes. At the per share level, Oshkosh might then generate $2.82 of earnings. Assuming there is no change in valuation, one might conclude that a $34 share price is reasonable. Oshkosh presently trades at $56 such that the loss of equity value could be 41%.

Of course, the diminution of earnings could be more severe if Oshkosh experienced some cyclicality of its earnings concurrent with a reduction of U.S. government income. If the appearance of cyclicality is rather fierce, Oshkosh could suffer a dramatic decline in earnings perhaps even greater than 40%.

This company has strong fundamentals and has been hammered by the market recently for reasons I disagree with. The acquisition of JLG Industries will help raise revenues immediately and the need for Oshkosh's trucks is only going to go up. If the market goes through a correction soon, this company may take a hit right along with it, but long term it is going to go up.

It's time to put my CAPS reputation on the line, in line with what I'm writing about Oshkosh (http://www.fool.com/investing/high-growth/2008/01/31/foolish-forecast-oshkosh-backs-up-the-truck.aspx).

What we have here is a stock trading at 12x trailing earnings, 7.5x trailing free cash flow, and when you add in the debt, an enterprise value-to-free cash flow ratio of 15. Not bad for a 22% grower.

Sure, a slowing economy will hurt Oshkosh. Sure, the prospects for MRAP II and JLTV contracts are tenuous at best. But the company is cheap based on its demonstrated long-term earning ability. I'd buy it at today's post-sell-off price.

This company just bought the company I work for, and so far I really like what I see as far as how they run things.

Management = underpromise/overdeliver... unfortunately this is built into expectations but the low p/e and strategic acquisitions to ahieve 15% annual growth is a boon

Yet one more pick based on a stock screening thing I'm playing around with. It'll be a nice learning experience for me to see how these do over time.

Thanks to TastyLunch for bringing this one to my attention. The financials don't look so good to me. A $2.5B debt load on revenue of $5B, an anemic RoA of 2.1%, negative RoE of -171%, -20% profit margin (and I expect this to fall more), a crappy EnterpriseValue-to-Revenue of less than 1 (0.73, to be exact), and a high EV-to-EBITDA number of almost 13 -- all of that doesn't spell good news even in good economy. I like the company's vehicles, but I think when this market turns south after October 2009, we'll see OSK giving up a lot of the gains it'd just taken in this crazy 5x jump since March ($5 to $25? are you kidding me?). Way overpriced. If I were an insider, I'd be backing the trucks up and dump-dump-dumping those shares. Thumbs down!

All about performance. Oshkosh is in the right industry at the right time.

Oskosh is a rock-solid company with outstanding management specializing in innovation.

Oshkosh is well-positioned for a bull market in commodities.

The war in Iraq will keep this Company busy fixing trucks for a long time.

Recommendations:
I've been looking at an entry point for this stock since the recommendation in the March 3rd,2008 edition Canadian Business Magazine @ $42.64. As well my other subscription to The Investment Reporter made the same recommendation that same week. I don't like picking up stocks right when they are recommended as there is a slight pop, but then this week Jim Cramer at TheStreet.com downgraded the stock... and for some reason I knew it was a buying opportunity.

Even the current Top Bear in this section has a valuation of $34 for a fair value of this company. (This was when the stock was trading in the $52). I see this as a good indication of being close to the bottom.

Technicals:
Earlier in the month this stock touched the low end of the Bollinger band and the RSI in the last day of trading was below 30 so it looked oversold and ready for a rebound.

Conclusion:
I think pravesh1 (Top Bear) and WeeValue (Top Bull) have both made good cases for buying this stock at its current price of around $36.

Expanding Product Lines and synergy of latest acquisition.

Solid fundamentals, increasing product line, quality products always make this company a good pick.

It appears to be undervalued and looks like a strong company with good fundamentals

Oshkosh Truck continues to beat it's competitors in the crucial government bids with its key Defense diviision. The "smart money" had written off Oshkosh Truck as too small to supply the government with enough armored vehicles for Afganistan and Iraq. But Oshkosh Truck is actually ahead of schedule in its production of these vehicles.

Oshkosh Corp builds trucks...big ass trucks. The company consistently grows earnings, and the street has somehow managed to decide that this is bad, pushing the stock down to trade at 10X current earnings, 9X forward. Oshkosh's commercial segment lagged last year, but the company saw solid growth in its defense and emergency equipment segments, and the addition of JLG should help make up for sagging commercial revenues.