Oshkosh: Power Struggles This Year (NYSE:OSK)

Shares of Oshkosh (NYSE:OSK) have seen some signs of life again, driven by a resilient operating performance and a bolt-on deal pursued in Italy. This comes as Oshkosh has seen a tough year in terms of margins, driven by supply chain issues. I see fair value at best here with long-term growth not being too impressive, albeit share buybacks and a strong balance sheet offset long-term sluggish sales trends.

An Intro

As Oshkosh does not get too much coverage on this platform, a short introduction seems warranted. The company is a producer of heavy equipment which includes machinery for fire & emergency crews, defense applications, construction and maintenance activities, environmental solutions and last-mile delivery.

The company generated $7.7 billion in sales in 2021 from producing and selling such machinery, marking a decent 13% increase in sales from the year before. Operating earnings rose 11% to $545 million. Net earnings of $473 million were very strong, pushed higher by a low effective tax rate, with earnings reported at $6.83 per share based on a share count of 69 million shares. Adjusted for the low tax rate and some other minor items, adjusted earnings came in at $5.75 per share.

This solid earnings power and the strong balance sheet of Oshkosh is a distinguishing factor as well, including a large net cash position. Splitting out the revenue composition we see that “access equipment” is responsible for roughly 40% of total revenues (generated from aerial work platforms, telehandlers and related products). Defense applications are responsible for a third of sales, fire & emergency for about 15%, and commercial applications (refuse collection and concrete mixes, among others) are responsible for the remainder of sales.

Coming back to the financial strength of the business. Oshkosh reported adjusted EBITDA around $650 million in 2021 while holding well over half a billion in net cash; $557 million to be more precise, equal to about $8 per share.

Some Perspective

Based on the strong 2021 results, albeit held back by supply chain issues, shares had risen to $120 early this year, a valuation equal to about 18-20 times earnings based on the adjusted earnings power and the net cash position. The reality is that revenues have been stuck in a $6-$8 billion revenue range for years now, accompanied by stable margins. To offset the lack of topline sales growth, the company has reduced the share count by a quarter, while maintaining or even increasing its balance sheet strength.

The company started the first quarter of 2022 on a soft note with sales up 3% to $1.95 billion, yet operating earnings collapsed to just $30 million as a result of fierce gross margin pressure. Second quarter sales were down 6% to $2.07 billion as margins were still down, but recovered a bit on a sequential basis. Lower sales were attributed to timing of orders in the defense market and supply chain issues disrupting the fire & safety business. With these disruptions taking longer than expected, the company cut the midpoint of the earnings outlook from $5.50 per share to $3.50 per share for the year.

In October, third quarter results revealed a flattish revenue trend at $2.07 billion, which corrected for inflation really indicates a decline in volumes. Promising is that margins recovered as the worst of the supply chain issues appears to be a thing of the past now. Operating profits were flattish around $107 million, and adjusted earnings were down five cents to $1.00 per share, or $1.64 per share so far this year.

A strong net cash position by the end of 2021 has turned into a net debt load of $121 million, mostly as the company has invested a lot of money into inventories, some capital expenditures into the business, as well as buybacks which have reduced the float to 66 million shares here.

And Now?

Following the dismal results in the first half of the year, shares of Oshkosh have fallen from $120 at the start of the year to a low of $70 in September, after which shares have seen a strong rebound to $92 at this moment. This means that equity of the business is valued at just over $6 billion here, or $6.2 billion if we factor in modest net debt.

Based on the adjusted earnings guidance, shares traded at an elevated 25 times multiple, mostly as earnings are soft this year. Given the challenges in its core business, it is the timing of a larger bolt-on deal which comes as a small surprise. In November, Oshkosh reached an EUR 186 million deal to acquire Italian-based Hinowa, a manufacturer of truck-based aerial work platforms.

Both business have been working together for more than a century as the deal is well-timed from a foreign exchange perspective, equal to 3% of the current value. This is a bolt-on deal, and if the same multiples are paid, this could add a quarter of a billion in sales, but unfortunately no financial details on the contribution of Hinowa.

Mixed Bag

Oshkosh has been hit hard by the supply chain issues and under normal conditions could earn about $5-6 per share. The latest dealmaking resulted in a small built-up in net debt, but nothing too worrisome, as this could be dealt with quite soon. While no details have been announced, it could be expected that earnings accretion might arrive to the tune of perhaps around $0.20 per share, depending on the margin profile of Hinowa.

With topline growth being a bit lackluster, despite ambitious 2025 targets (calling for sales growth and margin expansion), it is the long-term mixed sales performance which makes me a bit cautious here and in no rush to step in and join the ride.