Oshkosh: The Company Is Too Expensive (Downgrade) (NYSE:OSK)

Dear readers/followers,

It’s time to update on a company that I have not written about for almost 1.5 years. In this case, I’m talking about Oshkosh (NYSE:OSK), where my last article was published back in September of 2022. You can find that article here, and the article came with a positive “BUY” rating at the time. In fact, I have a small position that I’ve kept around since then, and as you can see, that position has significantly outperformed the market, making it what I considered a very successful investment for the past 2 years.

It highlights, as I see it, two lessons that I try to impart in my articles. First of all, the lesson of buying at undervaluation. Secondly, the lesson of patience. Both of these are crucial to successful investing, as I see it. Applying these correctly can result in outperformance, and it is this that I in fact depend on in my own work.

In this article, we’ll look at the latest results for Oshkosh and see what the company might be able to do for 2024 and forward. The share price indication is a positive one here – so let’s see if you should be buying Oshkosh here.

Oshkosh – A niche, but attractive business at the right price

The company’s dividend bump in the double digits should be a clear sign to you that this company is one that can be considered at the right price.

But what exactly makes Oshkosh a great company?

Well, I’ve written 4 articles on the business – and I’ll be happy to tell you what I think here. Oshkosh is a company I liken, in some ways, to industrial giant Caterpillar (CAT). These are great businesses, and I do mean great businesses, to buy when they’re cheap if your investment profile includes holding lower-yielding businesses for larger eventual returns.

My approach includes this.

This company operates under several brands – most of them brands I have never heard of in Europe, but that are very well-known in their respective fields and geographies where the company’s products are sold.

As you can see, the company also includes a military/defense segment, and the company’s operations focus on things like telehandlers, cranes, boom lifts, lifting equipment, defense vehicles, fire engines, commercial concrete/refuse, and other sort of businesses.

With over a century of being in business, Oshkosh makes for one of the more interesting companies out there in this segment, and I also like reminding investors that the very first truck constructed by the company is still in operation and is being driven by the company, albeit as more of a museum piece, not for actual work.

The company is best described as a sort of innovator with a focus on the design, development, and manufacture of very purpose-built vehicles.

Like many of the various companies in this field and sub-fields, Oshkosh is advancing in terms of the “EV/ESG of things”, with new products that are zero-emission, such as one of the first fully integrated zero-emission refuse collection vehicles.

Oshkosh has good fundamentals. The company is IG-rated, has a $7B+ market capitalization, and very low overall debt. It’s a very conservative and solid business, with superb dividend coverage, albeit at a very low dividend yield.

The company managed superb revenues for 4Q, with growth of 12%, an adjusted EPS of over $2.5, and an adjusted EBIT margin of almost 10%. The company is well-positioned for future growth and has been named to the sustainability world index for the 5th consecutive year. For the full year, with a full-year EPS of almost $10.

The company has ongoing product launches, with the all-electric Volterra ZSL.

The company also went ahead and raised the dividend by 12%. The company’s various segments also went very well, with Access being first.

The defense sector margin has increased, with increased orders for JLTV, and awarding a 5-year contract building the medium-sized equipment trailers for the U.S. army, a contract worth around $350M.

The so-called vocational segment is also running well, with a close-to-double-digit margin, improved margins, an improved supply chain, and a focus on increased throughput. The demand for Volterra continues to improve, with large orders from airports both in Europe and Asia – so the company does have international appeal.

The company’s margins are not the best in the business. With a net margin of just north of 6%, the company is somewhat average in profitability – but well above average in financial strength, with an overall interest coverage of over 12x, and a debt/EBITDA of 0.75x.

A few worrying signs exist. The company’s insiders are selling shares, the price is close to 2-year highs, and the company’s assets are growing on an annual basis faster than its revenues. In addition, in the last few quarters, the company has seen a decline both on the gross and operating margin levels.

Despite the high valuation, I can understand the argument that some investors make as to why Oshkosh should still be considered a strong business. This includes things like an overall very aged fleet of these types of vehicles, with many of these vehicles well past their expected life duration and replacement. There’s also the infrastructure investments that are being done across the world.

Also, unlike LVP, these vehicles have the advantage of multi-year growth cycles as well as defense programs where the company is a proven winner with the US DOD, as well as other state and government players, like refuse, fire trucks, and the USPS. While sales and EPS will continue to see impact from operating cost increases, which is part of why the current margins are declining (also higher incentive comp), the company is able to drive pricing, product mix, and CCA to keep its margins and bottom-line results at an overall attractive level.

The company has also provided us with an outlook for the coming fiscal, with expected revenue growth, operating income rising to almost a billion, and an EPS well over $10.

Overall, this company is still in a position to drive very positive results going forward. And while I expect the company to continue to grow, I don’t expect it to grow at the accelerated pace that we’ve seen in the reversal these last few 6-month periods, including the FY23 period with an over 100% EPS reversal. The current outlook for 2024 would mean an EPS growth of less than 5%, and I don’t forecast the company to be able to beat this in this macro for the foreseeable future.

Let’s look at valuation.

Valuation for Oshkosh

Oshkosh is cyclical despite everything, so in order to be comfortable with Oshkosh, you need to be comfortable with cyclicality and a low yield.

We’re currently talking a sub-1.6% yield with a multiple of around 12x. This doesn’t sound much, and it’s not – but this company only manages a 12-14x P/E over time, in this case, the 20-year normalized P/E.

Whenever you invest in something that doesn’t really pay all that well in terms of yield and is cyclical, you want to be careful to not buy it at too expensive a price, because it could end up taking a long time to recoup your money in the case of downside. And if you buy too expensive, that upside may never really materialize either.

But in this case, we do have an upside – it’s just that this upside does not meet my fundamental demands of a 15% annualized upside or above. In fact, annualizing at the 10-12 year mark at around 12.5x, this company does not even manage double digits, on an annualized basis.

As you can see, in order for Oshkosh to generate any sort of alpha you’d have to forecast it at least at 14-15x P/E.

Is this possible, and within the realm of reason?

Absolutely! The company has many positives and the S&P Global analyst average for this business is actually above where the current share price is, with a current PT of $121.6 and a the share price, as I am writing this, of $120.38. So you can see the upside is relatively minimal – and comes closer to that 12-13x P/E rather than a 14-15x P/E.

Some investors call OSK a dividend growth investment. I would not say that this is the case. While the company does have a dividend that grows, the company’s dividend history is, for lack of a better word, just “bad”. The company cut it in 2010, did not have one until 2014, and has been on a 10-year streak since, but isn’t exactly “growing” as would be expected by a dividend growth stock here as I see it.

No, the way that I would view OSK is to buy it at a significant discount to then enjoy the sweet double upside of a capital appreciation and over 2% yield that is possible here. Because safe, that’s something this company is – with less than 20% long-term debt to cap, that is not an issue.

But forecastable and a solid investment at this price? With a 45% negative miss ratio with a 20% MoE (Source: FactSet), that is not the case for me. Forecasts are accurate a whopping 9% of the time on a 1-year forecast basis with a 10% MoE. These numbers translate to this company being very hard to forecast.

Quant ratings and Wall Street has Oshkosh at a “BUY” rating. I had the same before I wrote this article. I wouldn’t, as some have, go to a “SELL” rating here, but I will adjust my rating on Oshkosh to a “HOLD” as of this time and for 2024E unless the company significantly drops in valuation in the near term.

My thesis for 2024E for the company is now as follows:

Thesis

• This is a very high-quality business with great fundamentals and excellent management in an appealing, if cyclical, set of segments. The current foundation paves the road for a very convincing upside, provided you can buy it at the right price.
• In my first article, I said that this company’s cyclical characteristics will bring the company back down to fair value. That has happened and gone away again, and I would call this company “fairly valued” here, giving it a long-term PT of $120/share.
• Due to this, I call this company a “HOLD” at this valuation and change my rating.

Remember, I’m all about:

1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

This process has allowed me to triple my net worth in less than 7 years – and that is all I intend to continue doing (even if I don’t expect the same rates of return for the next few years).

If you’re interested in significantly higher returns, then I’m probably not for you. If you’re interested in 10% yields, I’m not for you either.

If you however want to grow your money conservatively, and safely, and harvest well-covered dividends while doing so, and your time frame is 5-30 years, then I might be for you.

These are my overall criteria, and how the company fulfills them.

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

The company is neither cheap nor undervalued here, meaning I will call it a “HOLD” at this time.