Date: 20 June, 2010
NYSE: OSK
website: www.oshkoshcorporation.com
CMP: $27/Share; Value: $35/Share
Oshkosh is Wisconsin based specialized utility vehicle and body parts manufacturer for several end user segments such as defense, construction, fire and emergency and waste collection. Oshkosh has been in business for 80 plus years and has been a key supplier to the US Defense since then. It is a premium player in each of the segment it operates in, viz., Defense, Access Equipment, Fire & Emergency, and Commercial. Originally, it was a supplier to US Defense and later on acquired related businesses and expanded its presence to other segments. It offers a wide range of extremely useful products - we may have seen them in operation multiple times but may have only seldom noticed.
For US Defense, it manufactures those kewl (slang for ultra cool) looking severe duty heavy and medium payload trucks. These trucks help in moving troops and material (missiles, fuel, tanks, ammunition) safely with surety at war and war-like locations. In 2007, it acquired JLG, a leading manufacturer of aerial work platforms and tele-handlers used in a wide variety of construction, agricultural, industrial, institutional and general maintenance applications to position workers and materials at elevated heights. Through this business, now it has a global presence in access equipment. The fire and emergency segment manufactures firefighting vehicles and equipment, aircraft rescue and firefighting vehicles (used during emergency situations), snow removal vehicles, ambulances and other emergency vehicles. The commercial segment manufactures rear and front-discharge concrete mixers, refuse collection vehicles, concrete batch plants and vehicle components for ready-mix companies and commercial and municipal waste haulers.
It has been winning business from US Defense (over 50% revenue generator currently) for over 80 years. In FY 2009, they won a $5.4 billion contract from US Defense by beating other leading players such as BAE, Mercedes, MAN Group, etc to it. They quoted $400 million lower than the nearest competitor and still made money on that contract. One of their core strengths - moat as some call it - is engineering and innovation and that allows them to develop a repertoire of proprietary parts at competitive costs. It is because of this moat were they able to quote lower and still made money. Another key strength, in addition to their strong relationship with the US DoD, is flexible manufacturing systems. Most were doubting their ability to deliver such a large order within contracted timeline. But showing great flexibility they shifted part of the work to facility for access equipment and delivered before timeline.
NYSE: OSK
website: www.oshkoshcorporation.com
CMP: $27/Share; Value: $35/Share
Buy - Leading player in each of its segments and one of the most successful suppliers to US Defense for 80 years, OSK is available at about 30% discount to its ValueCompany
Oshkosh is Wisconsin based specialized utility vehicle and body parts manufacturer for several end user segments such as defense, construction, fire and emergency and waste collection. Oshkosh has been in business for 80 plus years and has been a key supplier to the US Defense since then. It is a premium player in each of the segment it operates in, viz., Defense, Access Equipment, Fire & Emergency, and Commercial. Originally, it was a supplier to US Defense and later on acquired related businesses and expanded its presence to other segments. It offers a wide range of extremely useful products - we may have seen them in operation multiple times but may have only seldom noticed.
For US Defense, it manufactures those kewl (slang for ultra cool) looking severe duty heavy and medium payload trucks. These trucks help in moving troops and material (missiles, fuel, tanks, ammunition) safely with surety at war and war-like locations. In 2007, it acquired JLG, a leading manufacturer of aerial work platforms and tele-handlers used in a wide variety of construction, agricultural, industrial, institutional and general maintenance applications to position workers and materials at elevated heights. Through this business, now it has a global presence in access equipment. The fire and emergency segment manufactures firefighting vehicles and equipment, aircraft rescue and firefighting vehicles (used during emergency situations), snow removal vehicles, ambulances and other emergency vehicles. The commercial segment manufactures rear and front-discharge concrete mixers, refuse collection vehicles, concrete batch plants and vehicle components for ready-mix companies and commercial and municipal waste haulers.
It has been winning business from US Defense (over 50% revenue generator currently) for over 80 years. In FY 2009, they won a $5.4 billion contract from US Defense by beating other leading players such as BAE, Mercedes, MAN Group, etc to it. They quoted $400 million lower than the nearest competitor and still made money on that contract. One of their core strengths - moat as some call it - is engineering and innovation and that allows them to develop a repertoire of proprietary parts at competitive costs. It is because of this moat were they able to quote lower and still made money. Another key strength, in addition to their strong relationship with the US DoD, is flexible manufacturing systems. Most were doubting their ability to deliver such a large order within contracted timeline. But showing great flexibility they shifted part of the work to facility for access equipment and delivered before timeline.
Management
Oshkosh was led by Robert Bohn till Dec 2010. In Jan, Charles Szews took over. Szews has been part of the leadership team and was the COO when Bohn was the CEO. Szews has been involved in the company's new business development efforts, mergers and acquisitions as well as long-term strategic initiatives. He also had a significant role in building the company's international footprint and global procurement supply chain. Currently, major business for Oshkosh comes from US and Canada. However, in order to continue growing business they will need to win in global markets. In this endeavour, Szews's focus will certainly be useful.
Historical
In the last 10 years, Bohn transformed Oshkosh from a $400 Mn company into a Fortune 350 player. Over the last 6 years - 2005 to 2010 - Oshkosh delivered some fascinating results while sailing through tough environment on the way. Not so long ago, 2007-08, they seemed running out of gas with high levels of debt and macro-economic uncertainties facing them. But they did managed to salvage the situation with the record order win and delivering the same by marshaling all they had.
Exhibit: Historical
During the 6 year period of 2005 to 2010, Oshkosh
- Grew sales at 35% yoy
- Maintained EBIDTA margin of 11%
- Delivered ROCE (EBIDTA/Capital Employed) of 20%
- Delivered ROE of 23%
You would notice a sharp decline in PAT in 2009. This is because Oshkosh charged asset impairment of $1.19 Bn considering the prospects of newly acquired JLG business which declined significantly in that year. This, however, does not bother me. Because, one, Oshkosh cash earnings were highest at $899 Mn in that year and secondly, the prospects of JLG has not deteriorated much. In 2010, JLG posted $3 Bn in revenues similar to what it used to when it was bought.
Estimations
Going forward, Oshkosh is likely to continue on its growth path. US DoD requirements will not come down significantly in the near future because of prevailing geopolitical situation. Recent crisis in Middle East further adds to the demand for Oshkosh's products. Access Equipment segment has picked up from record decline. Oshkosh has a global footprint in this business which will not only help it grow this business but also grow other businesses in foreign markets. Emergency and Fire and Commercial also have strong long term prospects. I expect Oshkosh to invest a substantial share of earnings and borrowings for strategic acquisitions going forward. Additionally, I have (as usual, conservatively) assumed the following for projecting future earnings:
- Sales growth as 8% yoy as against 35% during 2005 to 2010
- Return on new capital to be lower by 2% from historical averages
- Redeployment rate of more than 80%
- Company to constantly work towards reducing Debt levels as indicated in their communication to shareholders
Exhibit: Estimations
Valuation
Now the question is how much should we, as value investors, pay for owning shares of Oshkosh. At current debt levels and earnings, Oshkosh earns $420 Mn per year for its shareholders. On the conservative side, it earns (taking out the impact of record order of $5.4 Bn in FY 2009) $250 Mn per year for its shareholders. If Oshkosh does not make any acquisitions or redeploys earnings to fund future growth, I will value its equity at $27/Share, i.e., ($250/12% + $370)Mn / 92Mn Shares. Sure, its worth more as Oshkosh will continue to make acquisitions and grow profitably.
Exhibit: Valuation
I have made the following assumptions:
- Its terminal growth rate will be 3%
- All $370 Mn are available to US Shareholders as cash as large share of business happens in US and Canada
- Value of Oshkosh Equity at $35/Share
- CMP of $27/Share
- Margin of Safety of 25% (equal to recommended value)
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