Military Contracts Pushed Oshkosh Over A Rough Patch

Jul.30.12 | About: Oshkosh Corporation (OSK)

Oshkosh (OSK) is one of the world's largest manufacturers of heavy vehicles. For the majority of their history they focused on making fire engines, ambulances and construction equipment such as cement mixers. Along with other manufacturers such as Caterpillar (NYSE:CAT) and and Navistar (NYSE:NAV), they saw major cutbacks in these markets due to the global economic troubles starting in 2008.

The company has recently reported excellent results for the most recent quarter with earnings of 82 cents a share. This is up 7 cents year-to-year on sales of $2.18 billion. Sales showed an almost 8 percent increase. For the year to date sales are up $660 million although net income declined almost $1.00 due to "changes in the defense segment where an adverse product mix negatively impacted operating income comparisons, offset in part by improved access equipment and commercial segment results as well as favorable discrete income tax benefits." The company did improve its overall outlook for 2012 despite the decline in net income.

Oshkosh made the decision five years ago to invest heavily in the Mine Resistant Ambush Protected (MRAP) vehicles market. These vehicles were a reaction to the Improvised Explosive Device (IED) and mine threat in Afghanistan and Iraq. The U.S. began to invest heavily in these types of vehicles to protect troops mainly on road bound transportation missions. Previously similar systems had been used in small quantities by Israel and South Africa which had faced this type of threat over the years.

The Pentagon driven by Congress created a massive demand over a few years for hundreds of these vehicles. They ended up being used by all services to protect their Soldiers, Marines, Airmen and Sailors. While traditional suppliers such as BAE Systems and General Dynamics (GD) also produced MRAP vehicles the large market allowed Oshkosh, Navistar and Force Protection, now part of GD, to provide these vehicles. Suppliers also made money on training, spare parts and maintenance support for the rapidly growing fleet.

Oshkosh especially did well as they won a contract to build a new system, the MRAP-ATV, for use in Afghanistan. This was a lighter, more maneuverable vehicle that was tied to the larger U.S. concentration on Afghanistan as the fighting in Iraq wound down. The company realized a great deal of work and revenue from the system.

Oshkosh also made use of some of its excess production capacity caused by a drop in demand for its normal product lines to win a contract from the U.S. Army to build logistic trucks and trailers. The Family of Medium Tactical Vehicles (FMTV) and Family of Heavy Tactical Vehicles (FHTV) had been made by BAE Systems in Sealy, TX for over 20 years. The Army used the fact that it owned the design to transfer the contract to another supplier with Oshkosh bidding the best cost. The U.S. has ordered thousands of the vehicles from Oshkosh to replace losses since 2001. Unfortunately margins on the programs have been such that Oshkosh has not realized a great deal of profit from the work.

As expected the drawdown in U.S. commitment to Iraq and Afghanistan has led to lower demand for Oshkosh military products. Yet these two major contracts provided not only a large amount of revenue but kept their workforce stable during the time the commercial product lines suffered. In 2009, the company lost $1 billion dollars, primarily due to a goodwill write down. Military programs led to a rebound of sales in 2010.

Now as military programs decline Oshkosh is seeing their commercial products recover. Access Equipment, Fire and Emergency and Commercial business segments all saw sales increase over 10 percent year-to-year. Defense saw a 13 percent drop in sales although at almost $1 billion for the quarter they remain the largest part of the company. For the full year these trends should continue with the other segments making up for the overall decline in defense sales.

Oshkosh does continue to look for other military work. It has won contracts from other countries and is bidding on new programs in Canada as well as the upcoming HUMVEE replacement program, the Joint Light Tactical Vehicle (JLTV). These offer the potential for improved defense performance but like all corporations supporting the Pentagon the future is a little hazy on what will happen to the defense budget.

Oshkosh will continue to see growth in its other sectors as long as the world economy does not slide back into recession or depression. As it does recover demand will increase for its products especially if construction begins to grow.

The company has exceeded analyst expectations the last four quarters. Stock price was almost $23 at Friday's close. The 52 week high of $26.34 was reached in January and the stock is down 13 percent compared to the overall market. The company is pursuing a buyback program and if results continue as expected there should be a good push up over the next few months. Long term it will be dependent on how the defense budget shapes up and the overall economic performance of the U.S. and the rest of the world.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.