Signal From Noise
Signal From Noise
-A relatively mild CEO warning about 2020 sent the stock reeling over 10%
-OSK raised guidance and has a sizeable backlog of $5 billion; a $110-$120 stock?
-OSK’s mix of mission critical vehicle businesses bodes well for long term growth
What’s the power of a few words? The recent sharp drop in the stock price of Oshkosh (ticker: OSK) shows pretty convincingly that Mr. Market (too) often shoots first and asks questions later. In the case of Oshkosh, on August 1, the company gave out a cautious comment on 2020 about one of its main businesses, which knocked the stock. Admittedly, it was a bad day for the market, too. However, a deeper look into the OSK selloff suggests Mr. Market’s kneejerk emotional reaction has provided a relatively inexpensive long term entry point for the stock of an extraordinary industrial company.
OK. First, what’s with the name, Oshkosh? Really? I know it sounds like a company that makes infant toys, but the truth is OSK is one of the biggest yet relatively unknown makers of specialized, defense and emergency vehicles and equipment. It’s mission critical stuff, from Department of Defense heavy and medium transports to firefighting trucks and emergency response vehicles and even concrete mixer trucks. The name comes from the town where it’s headquartered in Wisconsin, but OSK is a global firm, selling around the world, with manufacturing plants around the country and in Europe and Asia.
So what happened exactly? In the most recent earnings call, on August 1, the CEO noted the “access equipment markets in North America and Europe could be down modestly” next year. Access equipment, like telehandlers and aerial work platforms, is roughly 49% of sales, while DoD is 24%, fire emergency 15% and commercial 12%. Meanwhile, it was an excellent quarter, with sales up 10% to $2.4 billion and EPS up to $2.72 from $2.05 in the year ago quarter. Moreover, the company raised guidance for fiscal 2019, which ends this month.
But investors chose to focus on the negative here. Now I’m not suggesting one ignore that 2020 concern, but context is everything. Half of OSK’s sales isn’t really cyclical. The DoD business, which rose 7% in the first nine months of the fiscal year ending Sept. 30, should grow even faster under the Trump Administration. Access equipment and fire & emergency margins have been rising. And as we have noted before, FSinsight
believes we are mid-cycle not late cycle. That suggests that while OSK is cautious about access equipment, it’s likely things won’t slow to the extent the market believes. That leaves room for opportunity.
The stock has dropped more than 10% to around $76 and far below all-time highs of $96, reached in early 2018. Effectively, the stock’s been orbiting around $70 since then. OSK is a robust business, one that’s stood the test of time for over a century.
New Constructs, an independent research firm, points out the long term trends for OSK are positive and the valuation prices in a permanent profit decline. While the potential decline in 2020 demand is a concern, the market underrates OSK’s diversified businesses; its innovation and excellent leadership, and its long term growth potential. “These factors should help OSK weather any cyclical downturn and deliver long term value.”
OSK’s diversification also gives it a competitive advantage by allowing it to provide more comprehensive product solutions to customers than many customers. The stock is the cheapest it’s been since 2016, after which it doubled, notes New Constructs in a recent report.
Here’s what I like about Oshkosh: it sports a 23% return on equity; double digit dividend growth; a sizeable backlog; and excellent product reputation in mission critical businesses.
OSK shares currently trade at a forward price/earnings (P/E) ratio of 9.8 times, significantly lower than its 10-year average and median P/Es of 16 times and 14 times, respectively. Now Oshkosh, like its name, is a bit of an odd bird. Given the breadth of its businesses, there’s no perfect comparable peer that is publicly-traded. I’ve put together a table of firms that are similar to different extents, makers of cranes and aerial equipment and defense companies.
Oshkosh is valued at the lower end, with the crane/machinery firms, and far below the defense firms, which get 14-16 times P/E. With only 25% of the business in defense, I don’t suggest Oshkosh is a defense company, but just maybe it deserves a better multiple, one closer to defense than cranes and construction. If we are mid-cycle, then EPS could reach $10 per share in a couple of years. If the market applied a more reasonable 11 to 12 times PE, the stock price could hit $110 to $120.
Here’s another anecdotal but interesting bullish fact: Wall Street’s sell side is lukewarm on Oshkosh stock. It’s hard to go wrong longterm voting against the aggregate view from the sell side. Of the 18 analysts who follow OSK, 44% have a Buy rating on the stock, the lowest level since the 2008-09 market crash. It’s not hated, but Wall Street sure doesn’t like it much.
Where could I be wrong? If the economy is late cycle and the recession risk elevates, OSK’s stock could drop some more.
Bottom Line: For investors with a longterm horizon, OSK looks cheap.