Description

Looking to elevate your investment returns in 2024? May I offer you Oshkosh’s common.

Preamble

In the table below, I compare the change in the Russell Growth and Value indexes over the last many years. Indexes are very diversified and arbitrary. But the numbers nonetheless tell an interesting story. After moving broadly similarly for two decades, the two indexes have diverged markedly for the last eight years (through Friday).

I can come up with a number of plausible reasons that might explain this divergence AND which argue that one shouldn’t necessarily expect the indexes to converge or “mean revert,” such as 1) the emergence of the dominance of the US worldwide tech monopolies, 2) the increasing importance of technology and health care to our economy, 3) the decade decline of the oil & gas businesses, 4) “disrupters,” etc. etc. At the same time, however, one shouldn’t be surprised if, after a decade of lackluster asset price appreciation, there are some underpriced securities included in the value index. And I expect that these securities are poised to appreciate more in the future due to that disappointing recent past. In particular, businesses that benefit from increased infrastructure investment and increased domestic manufacturing might do especially well. I have stumbled upon a few of these among niche domestic industrial companies. A good example is Oshkosh.

Oshkosh’s common stock is an investment that should do very well if infrastructure and other non-residential construction activity continues to improve for the next few years. 

Oshkosh’s business

Oshkosh is a conglomerate that manufactures niche vehicles and equipment. The most important products are: 1) aerial-work platforms (JLG brand), 2) telehandlers (think fancy forklifts), 3) fire engines, 4) post office delivery vehicles, 5) some military vehicles and kits, 6) front-discharge cement mixers. And there are more products. Many of these products have increasing technology content, such as different drive trains (think EVs), capabilities (AV-like abilities), telematics, etc. and these types of developments favor the largest OEM in the category, which Oshkosh often is. They usually have high market share.

The company is over 100 years old and initially built four-wheel drive trucks, cement carriers, and military vehicles. A transformative acquisition came in 2006, when the company acquired JLG, the largest domestic manufacturer of aerial-work platforms. This both 1) added a very strong and well-positioned OEM business to the conglomerate and 2) messed up Oshkosh’s balance sheet for a period. After having a tangible asset value of negative $2.2 billion after the acquisition, the company over years built the tangible book value up to positive $1.7 billion funding $2.7 billion of net tangible assets, before a recent acquisition of an airport equipment business from John Bean Technologies.  

Today, about 70% of the earnings are in the company’s access equipment segment (primarily aerial work platforms and telehandlers), but I expect the business to be closer to 50-60% of the company’s earnings in 2026, when the other segments and the recent acquisition are earning more.

Earnings power

In 2021, the current CEO, who had previously run the Mercury outboard engine business for Brunswick, took the job. He introduced management’s earnings and other financial targets for 2025 – the key one being an EPS of $11-13 per share, compared to $7.83 in 2019 (the best pre-pandemic figure).

Since that time, the company lost around $1 of earnings power with the loss of a military jeep contract (JLTV) and gained around a similar amount from the acquisition of the airport equipment business mentioned above. Most importantly, however, the access equipment business is already earning more than management’s 2025 goal. I expect management to update these financial targets at some point, perhaps this year.

The manufacture of long-lived capital equipment is cyclical; I do not know what economic activity levels will be in 2026. But I think one can reasonably estimate the earnings of Oshkosh in a few years given a normal economy. And one must start with their access business.

Management and I believe that 2019 was a normal year in terms of revenue for the access equipment business (a regression analysis going back to 2005 might make 2017 to appear to be a better base year, but I believe the period represents below normal demand due to below normal infrastructure investment and the decline of the O&G business – see the earlier short writeup on OSK). Grown at 5% generates revenue of $5.7 billion, which I believe is conservative particularly given the inflation of the last two years, and applying management’s margin goals of 15% (present margins are above this level) generates expected earnings power of more than $850 million. I feel comfortable with the estimate given the size of fiscal spending to support infrastructure investment in the IRA and CHIPS acts, as well as the replacement demand that is imbedded in the age (old) and size of the rental companies access equipment fleet (i.e. see Ashtead’s and URI’s reports).

In addition, the company’s other businesses, net of corporate costs, should generate nearly $500 million of operating profit (given the diverse and less material nature of these business lines - no one business will make or break my hoped for earnings - I will save for the comments). After interest expense (debt is termed and fixed excluding acquisition financing), a 25% tax rate, and 61 million shares (repurchases will resume in a year or so) generates an EPS of $15+. The average PE from 2015-2019 (prior to COVID craziness) was 13.7 X, and I consider lower-quality with the weaker balance sheet and less favorable mix and future prospects. $15 EPS X 14 PE generates a $210 promised stock price, compared to the current price of $110. And the dividend is $1.64 per year.

Catalyst

"Value" stocks are properly appraised by Mr. Market.