Business Overview
You may not know it, but I can guarantee that you have seen Oshkosh (OSK) products everywhere. They make all those cool things you loved as a kid: heavy duty military vehicles, ambulances and related medical vehicles, snow removal vehicles, garbage trucks, and cement mixers. A recent acquisition, JLG (more on this later) makes "access equipment," things like cherry pickers and telehandlers. Many of these are low volume, niche businesses.
Valuation
P/E: 4.3
P/FCF: 5.5
P/S: 0.3
P/OE: 3.9
However, 2010 was a record year for OSK. OSK won a government contract for the M-ATV, contributing close of half of OSK's sales for 2010. The company expects this contract to be completed by September 2011 (with the bulk finished much earlier), thus, sales will ramp down significantly in the defense segment in 2011. In a partial offset to this, OSK, in August 2009, was awarded the government contract for the government's FMTV, a smaller but still significant opportunity. In fact, the company has estimated that 2011 will be the second best in its history for the defense segment, a history that stretches back 80 years. OSK is estimating that revenue in its defense segment will be about $4 billion next year.
The Opportunity
The defense segment accounted for over 70% of revenues in 2010, up from 28% in 2008. This is due both to an expansion of the defense segment, but also a huge dropoff in the access segment. External sales fell by 2/3 over this time period. And this is where the opportunity with OSK lies.
It might not happen next year, or the year after, but there will be improvement in OSK's other segments. They have been beaten down, and badly, by the economic climate. The access segment in particular has suffered from the slowdown in construction and companies prolonging the replacement of equipment. Other segments, such as the medical vehicle segment, have suffered from municipal budget crises. The good thing is that you can only prolong these replacements for so long, eventually, something has to give. Communities need ambulances; construction companies need cement mixers and scissor lifts. Because we are buying when these segments are at rock bottom, we stand to gain as they recover, even after taking into account the step back that defense will take next year.
A couple other quick things I like about OSK: management is long tenured, so even with their CEO stepping down this past year, top management is experienced; insider ownership is good, but not great; and the company has shown innovation in their products (see, for example, that TAK-4 independent suspension system).
Risks
I have a couple of worries about OSK. The first is the company's desire to expand through acquisitions. These have generally worked out well, however, with the acquisitions being companies with related businesses and for the most part having no issues. However, recently, the company sold its money-losing Geesink subsidiary, an European refuse collection vehicle company. In fiscal year 2009, OSK took a $1 billion writedown on its access equipment subsidiary, based on pretty bad results in 2008 and 2009. Both of these worry me some, but not terribly. I think Geesink was partly a casualty of the economy, and JLG has certainly been affected as well. Also, although OSK certainly didn't get a deal on JLG, by no means do I think that they grossly overpaid (pre-acquisition revenue was $2.5 billion, and closer to $3 billion after, and operating earnings were around $250 million).
Also, OSK still has about $500 million in debt left over from the JLG acquisition, along with $500 million in long term debt issued in March 2010. FCF in 2010 was about $550 million, meaning that the company could potentially pay this debt off in two years, which is good.
Lastly, government contracts with OSK can be canceled at any time by the government. Given that OSK has recently been awarded some important contracts, this seems like a remote possibility, at least in the short term, but it is something I will keep an eye on.
All of these issues are things to monitor. If the company starts to engage in diworseification, if debt gets to unmanageable levels, or if the government starts to cancel OSK's contracts, I'll probably cut my losses.
The Bottom Line
I'm pegging next year's value at somewhere between $3.1 billion and $6.5 billion. The low is using owner earnings with a 10X multiple and the high is using FCF with a 15x multiple. This is assuming no improvement (and no further deterioration) in the non-defense segments and, as mentioned above, $4 billion in sales for the defense segment. So OSK is either slightly overvalued or grossly undervalued going into next year.
OSK won't stay down for long. So many of its end users depend crucially on its products that purchases can only be delayed for so long. And when the construction industry (and municipal budgets) start to improve, OSK will benefit immensely.
