This Former Icahn Holding Is Up 68%... With More Gains To Come

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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:OSK) 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 2011.

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 construction sector.

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 million.

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 efforts.

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 sluggishness.

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 ( EPS ) 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 metrics that are the foundation our premium newsletter , Total Yield . These are some of the world's most stable, profitable companies and my colleague Nathan Slaughter has spent countless hours identifying these firms. Not only has the strategy returned an average of 15% per year since 1982, but it's outperformed the S&P during the "dot-com" bubble and the 2008 financial collapse too. To learn more about his "Total Yield" investing strategy, click here .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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