Even the world's greatest stock pickers make mistakes,
including the famous activist investor Carl Icahn.
At the end of 2012, Icahn closed his position in one of the
world's leading heavy-duty truck and specialized construction
equipment manufacturers. The decision to sell followed a failed
hostile takeover attempt in which Icahn offered to buy out
current shareholders for almost $3 billion, excluding the nearly
10% stake he already owned.
Had Icahn been successful, he would have pushed for the election
of six new board members who supported his vision for the company
-- to spinoff of its JLG subsidiary that makes aerial work
platforms and tow-behind trailers. However, not enough
shareholders accepted Icahn's tender offer, and he ended up
walking away from the stock entirely.
While hindsight is always 20/20, there must be some degree of
seller's remorse on Icahn's part. Since he jettisoned the stock
nearly 20 months ago, the price has spiked 68% -- and that's with
a 10% pullback following a third-quarter earnings miss reported
on July 28.
Any near-term obstacles aside, shares of
Oshkosh Corp. (NYSE:
should continue to deliver excellent returns in coming years.
This may not seem reasonable given the firm's performance lately.
For instance, annual revenues have contracted a bit since 2011,
falling from $7.6 billion to $6.9 billion during that time. Net
income is off slightly, too, to $268 million from $273 million in
Still, just two days after Oshkosh's disappointing Q3 report,
analysts at the financial services firm Robert W. Baird upgraded
the stock to "outperform" from "neutral" with a price target of
$55, roughly 14% higher than the current price of about $48. Out
of the 16 analysts who cover Oshkosh, 10 rate the stock a "buy"
and six see it as a "hold."
This and the stock's recent outperformance strongly suggest
positive things are afoot here, that the firm is fundamentally
sound and management is taking action to get Oshkosh on a solid
growth track. And that is indeed the case.
Oshkosh has more cash on its balance sheet than ever -- $734
million, or nearly 11 times the average of $69 million it held
from 2004 through 2008. The current cash total is more than 11
times the firm's $65 million in short-term debt.
At $890 million, long-term debt is at its lowest since 2007 when
Oshkosh took on nearly $3 billion of debt to help finance the
purchase of the JLG subsidiary Icahn later wanted to spin off. A
progressively stronger cash position and free cash flow of more
than $2.5 billion since the buyout have both been major factors
in reducing long-term debt by more than two-thirds.
The most important step Oshkosh is taking toward solid, more
reliable growth: diversifying its revenue stream. For decades,
the firm's main customer was the Department of Defense, which
relied on Oshkosh for heavy-duty, four-wheel-drive military
vehicles. This, historically, accounted for well over half of
total revenue and sometimes even as much as three-fourths.
But with the defense budget set to be slashed dramatically in the
long-term, focusing on alternate revenue sources is wise. In the
latest quarter, for example, while sales dropped by about 12%
overall, they climbed more than 10% in the access equipment
segment, which was formed when Oshkosh acquired JLG. Apart from
JLG's products, the segment offers things like tow trucks and
roll-back vehicles. Commercial segment sales jumped 27% in fiscal
Q3, spurred by rising demand for cement mixers in the rebounding
North America currently accounts for about 82% of total revenue,
but Oshkosh has begun seeking greater geographic diversification,
particularly in the Middle East. Last September, the company
completed delivery of 750 of its mine-resistant, all-terrain
vehicles to the United Arab Emirates in a deal worth $381
Together, Europe, Africa and the Middle East generated sales of
$899 million in fiscal 2013. Although that's an 81% increase from
their fiscal 2010 total, it's a 7.8% decline from sales from
these regions in fiscal 2012.
I'm not too worried about this, though. Management knows how
crucial it is for Oshkosh to win international business and says
it expects to announce new contracts, in particular with Middle
Eastern countries like Saudi Arabia, Iraq, Egypt and others in
the coming years. So I see any further drop-off in foreign
business as temporary, as the firm ramps up its global sales
Risks to Consider:
It could take a couple years, perhaps even longer, for
Oshkosh to sufficiently increase international sales. Overall,
the company's performance may display some near-term
Action to Take -->
Oshkosh is making the transition necessary for a bright future --
expanding globally, taking advantage of increased demand for its
non-military products, and relying less on the U.S. government,
which now only accounts for about 36% of sales. Even though the
near-term could be tough, the firm can meet analyst expectations
of a 13.5% annual increase of earnings per share (
) for the next five years. This growth rate implies 89% upside
for the stock through 2019 based on current EPS of $3.56 and a
projected earnings multiple of 13.5. That's enough to make Icahn
think twice about selling his shares.
Oshkosh is paying down its debt... one of three key
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