Oshkosh Corporation
RECOMMENDED ACTION
Current Price:
YE2010 Target Price:
Projected Return*:
$37.97
$42.35
+11.54%
Recommendation:
HOLD
Report Date:
11.20.2009
ANALYST INFORMATION
Analyst:
Melissa Hickey
Fisher College of Business
Contact:
Email:
(614) 406-1207
hickey_75@fisher.osu.edu
Fund:
Manager:
OSU SIM
Royce West, CFA
STOCK INFORMATION
Sector (S&P):
Industry (S&P):
Market Cap:
Shares Outstanding:
Avg Daily Volume:
YTD Return:
52 Week Range:
Dividend Yield:
Beta:
Industrials
Trucking
3.5B
89.4M
2.2M
327.11%
$3.85 - $40.74
None
2.91
*includes dividend yield
NYSE: OSK
Investment Thesis
The one-year target price for Oshkosh Corporation is $42.35 based on its competitive position within the
Trucking industry, current macro-economic factors, its continued contract wins, and its strategy to grow in both
domestic and international markets. The valuation is based on a Discounted Cash Flow (DCF) and Absolute
Valuation Models. The HOLD recommendation is due to the fact that Oshkosh has a diversified portfolio of
products which assists in mitigating lulls as they impact some segments harder than others on a
macroeconomic level. Oshkosh has an expected stock appreciation of 11.54%.
Stock Catalysts
In addition to gaining a significant number of military contracts, it is likely that that this positive momentum will
continue in the next few months due to recent wins on delivery timing. It is my belief that the benefits of said
contracts are already priced in the stock, however, there is upside in this stock as Oshkosh continues to focus
on innovation and efficiency. Oshkosh continues to be a global leader in specialty vehicles with top brands and
leading market share in key markets. I predict a solid near term outlook for the Defense segment and long
term growth in the Access Equipment segment. In addition, Oshkosh’s superior distribution and service
network with both government and commercial customers combined with the company’s reduced cost
structure positions Oshkosh to be successful. The experienced management team has done significant work on
reducing the outstanding debt balance and continue to improve the capital structure of Oshkosh Corporation.
Key Risks
Defense contract risk
Reduction in U.S. military spending will result in a significant loss of revenue
Protests by competitors for recently won contracts may pose risk
Obama’s pending decision on the future US involvement in Afghanistan
OSK continues to carry a heavy amount of debt, inherent risk of default
Execution of current delivery schedule
Integrating acquisitions could be costly if not done efficiently
Slow global recession recovery
Foreign risk and rate adjustments
OSK 12-Month Price Movement
Table of Contents
Table of Contents
Company Overview ...................................................................................................................................... 3
Oshkosh Corporation ................................................................................................................................ 3
Business Segments Overview .................................................................................................................... 4
Business Segments Operating Results ...................................................................................................... 5
Competitive Advantage............................................................................................................................. 6
Recent Events & Acquisitions .................................................................................................................... 7
Sector Analysis.............................................................................................................................................. 8
Industry Analysis .......................................................................................................................................... 9
Investment Thesis....................................................................................................................................... 10
Fundamental Drivers ............................................................................................................................... 11
Business Analysis ..................................................................................................................................... 12
Financial Ratios ....................................................................................................................................... 13
Income Statement Projections................................................................................................................ 14
Multiples Valuation ................................................................................................................................. 15
Discounted Cash Flow & Sensitivity Analysis .......................................................................................... 16
Key Risks ..................................................................................................................................................... 17
Downside................................................................................................................................................. 17
Upside ..................................................................................................................................................... 18
Recommendation ....................................................................................................................................... 19
Resources .................................................................................................................................................... 20
2
Company Overview
Type:
Founded:
Headquarters:
Oshkosh Corporation
Employees:
Oshkosh Corp. is a designer, manufacturer and marketer of a range of specialty vehicles and vehicle bodies.
The Company operates in four segments: Access Equipment, Defense, Fire & Emergency, and Commercial.
Oshkosh maintains several major brands that are considered leaders in the market including: Oshkosh, JLG,
Pierce, McNeilus, IMT, Medtec, Jerr-Dan, CON-E-CO and London.
Oshkosh is a global enterprise that has driven revenue from $1.3 billion in fiscal 2000 to a peak of $7.14
billion* in fiscal 2008. This financial performance is the result of the company’s diversified business model
and focused growth strategies:
Embrace operational excellence - Oshkosh's manufacturing philosophy of mass customization
delivers highly specialized vehicles, while its large-scale manufacturing operations provide
significant economies of scale.
Lead in product innovation - Oshkosh seeks to introduce more new products and technologies
than its competitors in each end market, giving the company a distinct competitive advantage.
Oshkosh is at the forefront of robotic vehicle development, diesel-electric drive technology, and
independent suspension systems.
Commercialize through acquisitions- Oshkosh has a proven record of completing strategic
acquisitions, and then driving organic growth and cost reductions. Since 1996, the company has
completed 15 acquisitions.
Oshkosh Corporation has manufacturing operations in 10 U.S. states and in Australia, Belgium, Canada,
Germany, France, The Netherlands, Romania, Sweden and the United Kingdom. According to the OSK 10-K
filing, sales to the U.S. government comprised approximately 52% of the Company’s net sales in fiscal
2009. No other single customer accounted for more than 10% of the Company’s net sales for this
period. In addition, About 84% of F2009 revenues were generated in the United States (up from69% in
F2008 as Defense revenues grew significantly), with about 10% generated in Europe, Africa, and the
Middle East.
Oshkosh Corporation’s primary competitors are:
BAE Systems Land & Armaments L.P. (privately held)
Federal Sign Corp (FSS)
Terex Corp. (TEX)
Public (NYSE: OSK)
1917
2307 Oregon St.
Oshkosh, WI 54902
12,400
Chairman & CEO: Robert G. Bohn
EVP & CFO:
David M. Sagehorn
Website: http://www.oshkoshcorporation.com/
Factors currently driving sales :
Presence of government contracts
Strong market position
The price of steel and iron
Innovative and proprietary components
Flexible and Efficient Manufacturing
Currency exchange rates
Factors driving sales in the future:
Global growth and profitability
Introduction of new and improved
products
Capitalizing on old products in new
markets
Providing superior quality and service
Focusing on lean operations
"People who run our trucks and truck bodies do important work – protecting
freedom, fighting fires, roadside response, building infrastructure, handling waste.
They deserve and receive nothing less than our best effort."
— Robert G. Bohn
Chairman and Chief Executive Officer
3
Company Overview
Business Segments Overview
Access Equipment
Aerial work platforms and telehandlers used in a wide variety of construction,
industrial, institutional and general maintenance applications to position workers and
materials at elevated heights. Access equipment customers include equipment rental
companies, construction contractors, manufacturing companies, home improvement
centers and the U.S. military.
Defense
Heavy- and medium-payload tactical trucks and supply parts and services sold to the
U.S. military and to other militaries around the world.
Fire & Emergency
Custom and commercial firefighting vehicles and equipment, aircraft rescue and
firefighting vehicles, snow removal vehicles, ambulances, wreckers, carriers and other
emergency vehicles primarily sold to fire departments, airports, other governmental
units and towing companies in the U.S. and abroad, mobile medical trailers sold to
hospitals and third-party medical service providers in the U.S. and Europe and
broadcast vehicles sold to broadcasters and TV stations in North America and abroad.
Commercial
Concrete mixers, refuse collection vehicles, mobile and stationary compactors and
waste transfer units, portable and stationary concrete batch plants and vehicle
components sold to ready-mix companies and commercial and municipal waste
haulers in North America, Europe and other international markets and field service
vehicles and truck-mounted cranes sold to mining, construction and other companies
in the U.S. and abroad.
4
Oshkosh Corporation is comprised of four business
segments: Access Equipment, Defense, Fire &
Emergency, and Commercial . A brief description from
the Oshkosh Corporation website is provided in the
boxes to the right. The following information was
consolidated from the Oshkosh Corporation website
and the FY09 Annual Report and the J.P. Morgan
Initiation Report.
Revenue by Line of Business FY09
15%
Access equipment
42%
17%
Defense
Fire & emergency
Commercial
26%
Company Overview
Business Segments Operating Results
Defense
This is currently the most important segment. Operating income increased 52.1% to $403.3 million, or 15.5% of sales, in fiscal 2009 compared to
$265.2 million, or 14.0% of sales, in fiscal 2008. The increase in operating income as a percent of sales compared to fiscal 2008 reflected better
absorption of fixed costs, lower material costs, improved performance on service work and favorable LIFO inventory adjustments of $8.7 million
as compared with a charge of $5.7 million in fiscal 2008. Between 20001 and 2008 (pre-M-ATV) OSK’s Defense segment reported 28% per year
revenue growth and has delivered average operating margins of 14% with significant volatility.
Access Equipment
The access equipment segment incurred an operating loss of $1,105.6 million, including $892.5 million in pre-tax, non-cash impairment charges
for goodwill and other long-lived assets, in fiscal 2009 compared to operating income of $360.1 million in fiscal 2008. In addition to the noncash impairment charges, the decline in operating income was due to the impact of sharply lower sales volume, sale of units comprised of higher
cost materials purchased in fiscal 2008 when steel costs were high, and an increase in the provision for credit losses. The impact of these factors
was reduced by lower operating expenses as a result of aggressive cost reduction efforts.
Fire &Emergency
This segment incurred an operating loss of $14.7 million, including $123.0 million in pre-tax, non-cash impairment charges for goodwill and other
long-lived assets, in fiscal 2009 compared to operating income of $93.9 million in fiscal 2008. The impairment charges offset otherwise favorable
operating results for the segment due to a favorable product mix and improved performance at the Company’s domestic fire apparatus and
airport product businesses as well as lower operating expenses throughout the segment as a result of cost reduction initiatives. This segment
represented 22% of revenues and 51% of EBIT in F2009. From F2003 to F2009 the segment delivered average operating margins of 9.2%.
Commercial
This segment incurred an operating loss in fiscal 2009 of $183.7 million, including $184.3 million in pre-tax, non-cash impairment charges for
goodwill and other long-lived assets, compared to operating income of $4.7 million in fiscal 2008. The decrease in operating results was the
result of the non-cash impairment charges and the impact of sharply lower concrete placement products sales volume, offset in part by
reductions in operating expenses due to cost reduction efforts and a LIFO inventory benefit of $5.9 million due to significant reductions in
inventory levels.
5
“When hell and back is a daily
commute, you want to be in an
Oshkosh truck!”
Company Overview
~ quote from an 11/11/09 investor presentation
Competitive Advantage
According to the OSK FY2009 annual report, the competitive cost structure, strategic global purchasing capabilities, engineering expertise, product quality, and
global distribution and service systems have enabled Oshkosh to compete effectively. The following is a list of competencies that comprise the strength Oshkosh
Corporation which it requires to remain competitive.
Strong Market Positions. Oshkosh has developed strong market positions and brand recognition in its core businesses, which it attributes to its reputation for quality
products, advanced engineering, innovation, vehicle performance, reliability, customer service and low total product life cycle costs. Oshkosh maintains leading market shares
in most of its businesses and is the sole-source supplier of a number of vehicles to the DoD, including M-ATVs.
Diversified Product Offering. Oshkosh believes its broad product offerings and target markets serve to diversify its sources of revenues, mitigate the impact of economic
cycles and provide multiple platforms for potential internal growth and acquisitions. For each of its target markets, OSK has developed or acquired a broad product line in an
effort to become a single-source provider of specialty vehicles, vehicle bodies, parts and service and related products to its customers. In addition, OSK has established an
extensive domestic and international distribution system for specialty vehicles and vehicle bodies tailored to each market.
Quality Products and Customer Service. OSK has developed strong brand recognition among its products as a result of its commitment to meet the stringent product quality
and reliability requirements of its customers and the specialty vehicle and vehicle body markets it serves. OSK also achieves high quality customer service through its extensive
parts and service support programs, which are available to domestic customers 365 days a year in all product lines throughout the Company’s distribution systems.
Innovative and Proprietary Components. Oshkosh’s advanced design and engineering capabilities have contributed to the development of innovative and/or proprietary,
severe-duty components that enhance vehicle performance, reduce manufacturing costs and strengthen customer relationships. Oshkosh’s advanced design and engineering
capabilities have also allowed it to integrate many of these components across various product lines, which enhances its ability to compete for new business and reduces its
costs to manufacture its products compared to manufacturers who simply assemble purchased components.
Flexible and Efficient Manufacturing. Over the past 13 years, the Company has significantly increased manufacturing efficiencies. The Company believes it has competitive
advantages over larger vehicle manufacturers in its specialty vehicle markets due to its manufacturing flexibility, vertical integration, purchasing power in specialty vehicle
components and custom fabrication capabilities. In addition, the Company believes it has competitive advantages over smaller vehicle and vehicle body manufacturers due to
its relatively higher volumes of similar products that permit the use of moving assembly lines and which allow it to leverage purchasing power opportunities across product
lines. The Company believes its plan to meet the aggressive delivery requirements for M-ATVs under the recently awarded DoD contract is an example of its robust
manufacturing capability. In addition to the Company’s existing defense truck manufacturing facilities in Oshkosh, Wisconsin, the Company is assembling M-ATV crew capsules
and complete M-ATVs at its JLG manufacturing facility in McConnellsburg, Pennsylvania.
Strong Management Team. The Company is led by Chairman and Chief Executive Officer, Robert G. Bohn, and President and Chief Operating Officer, Charles L. Szews, who
have been employed by the Company since 1992 and 1996, respectively. Messrs. Bohn and Szews are complemented by an experienced senior management team that has
been assembled through internal promotions, new hires and acquisitions. The management team has successfully executed a strategic reshaping and expansion
of its business since 1996, which has positioned the Company to significantly improve its financial and operating performance.
6
Company Overview
Recent Events & Acquisitions
Oshkosh consistently shows up in the news. The following are key news events which have
taken place and were highlighted in a recent investor presentation.
•
M-ATV
–
Oshkosh announced as single source winner ($1.1bn contract for 2,244 vehicles)
on June 30, 2009
–
Awarded total of 5,219 MATVs thru November 9, 2009 (contract currently
valued at ~ $2.8 billion; including spares)
•
FMTV
–
Oshkosh announced as single source winner on August 26, 2009 with order for
$281 million
–
Test quantities scheduled for mid-calendar 2010, production deliveries planned
for early FY 2011
–
Contract duration extends to FY 2014 deliveries
–
Losing bidders have protested; GAO decision expected on December 14, 2009
•
MRAP Retrofits with TAK-4 suspension systems
–
Shipping and installing TAK-4 on MRAPs in Kuwait
•
Test & evaluation continues for various MRAPs (~16,000 in fleet) and other tactical
vehicles



Additional near term business opportunities
discussed in the news:
Australia Land 121
Aftermarket parts and services
M-ATV follow-on requirements from U.S. and
other governments
Acquisition History
1996 – Pierce Manufacturing Inc.
1997 – Nova Quintech
1998 – McNeilus Companies Inc.
1999 – Kewaunee Fabrications LLC
1999 – Viking Truck & Equipment
2000 – Medtec Ambulance Corp.
2001 - TEMCO
2004 – Jerr-Dan Corporation
2005 – CON-E-CO
2005 – London Machinery Inc.
2006 – AK Specialty Vehicles
2006 – IMT
2006 – JLG Industries
Oshkosh Acquisitions
Since 1996, Oshkosh has selectively pursued strategic acquisitions to enhance its product offerings and diversify its business. Oshkosh has
focused its acquisition strategy on providing a full range of products to customers in specialty vehicle and vehicle body markets that are
growing and where it can develop strong market positions and achieve acquisition synergies. In addition to acquisitions, the government
contracts will facilitate growth for Oshkosh. Acquisitions and dispositions completed during the past years are in the beige box above.
7
Sector Analysis
Industrials
Sector
S&P500 (SPX)
Energy (XOM.S)
Material (DD.S)
Industrials (GE.S)
Consumer Discretionary (TGT.S)
Consumer Staples (PG.S)
Healthcare (MRK.S)
Financials (JPM.S)
Information Technology (MSFT.S)
Return YTD
15.2%
4.6%
32.5%
9.5%
25.4%
6.5%
6.4%
17.6%
41.3%
Return QTD
-1.6%
-1.3%
-2.5%
-2.2%
-1.9%
-.2%
-1.4%
-1.3%
-2.4%
Telecom (VZ.S)
Utilities (EXC.S)
-4.1%
-.8%
-1.1%
-1.5%
Multiples Valuation – indicates that the Industrials sector is currently
undervalued
High
Low
P/Forward E
P/B
P/S
P/CF
26.9
5.9
1.9
16.7
9.2
1.4
0.6
4.9
High
Low
1.2
0.8
1.0
1.0
P/B
1.4
0.9
1.1
1.2
9%
P/S
P/CF
1.1
1.2
0.8
0.7
1.0
1.1
0.9
0.7
-10%
-36%
Relative to
SP500
P/Forward E
Median Current
% Current to LT
Median
Absolute Basis
17.8
3.3
1.5
11.9
16.9
2.5
0.9
7.3
Median Current
-5%
-24%
-40%
-39%
% Current to LT
Median
0%
Industrials Sector Economic & Business Analysis
Economic:
The Industrials sector is strongly correlated with the S&P 500, real
GDP, commercial and industrial loans, and durable goods orders. The
Industrials sectors appears to be correlated to Capital Spending with
the sector acting as a leading indicator by approximately 6 months.
There is a lag associated with the Industrials sector so while the
economy is in recovery mode, it will still take some time for business
to pick up again.
Business:
According to the Morningstar Q4 Outlook from September, 30 2009,
the outlook for U.S. Industrial activity is much better for the rest of ’09
and into ’10. An ISM purchasing managers survey indicates that the
ratio of new orders to inventories indicates industrial production will
be materially higher in the coming months. Additionally, that ratio is
at it’s highest point in 30 years and has only been at this level only 10
out of 740 months measured.
The Fed Beige Book offers mixed expectations for near-term outlook
on manufacturing (10/21/09). That being said, I expect slight gains
and modest economic growth in the short term. Companies are still
deferring projects and maintenance to conserve capital. According to
Thomson Baseline, the economy has now emerged from recession (at
least on a GDP basis) and is beginning a very slow recovery fueled in
the short –term by government stimulus spending. Given the
increasing optimism leading to more new hires and increased spending
on capital goods, I anticipate the end of the global recession to
positively impact the Industrials sector.
8
Key economic data points important to this industry
GDP, Implicit Price Deflator/CPI, Industrial Production and Capacity Utilization,
New Construction, Industrial Production and Consumer Prices of Major Industrial
Countries, U.S. International Trade In Goods and Services, U.S. International
Transactions, Federal Receipts (Revenue), Federal Outlays (Expenses), Federal
Debt
Industry Analysis
Trucking
Oshkosh is in the Trucking industry. According to Hoover.com, demand for
machinery depends on overall industrial activity and on the health of sectors such as
agriculture, construction, and power generation. The profitability of individual
companies depends on engineering expertise and efficient production. Large
companies have economies of scale in purchasing. Small companies can compete
effectively by specializing.
The US Heavy Truck and Bus Manufacturing is highly concentrated with the top 20
companies accounting for about 95% of revenue. Purchased materials and parts are
approximately 83% of sales. The heavy truck industry is subject to volatile demand
swings as economic conditions change.
Heavy truck demand is driven by growth in agriculture, manufacturing, construction,
and retail sectors. The profitability of individual companies depends on volume and
sales of high margin options. The industry is capital intensive. After market sale of
parts comprises approximately 10% of industry revenues.
According to IBIS World Truck and Bus Manufacturing Industry Report, in today's
connected and global age, local, interstate and international freight movements are
at the core of keeping the wheels of the world economy turning. Truck and bus
manufacturers rely heavily on activity in the freight sector for new and replacement
sales of trucks. In 2009, the US economy will be suffering one of the worst recessions
it has seen in years, which negatively affected just about every corner of the
economy: from the farmer whose harvest will not need to be transported anymore,
to the independent trucker who will face unemployment due to the slowdown in
industrial production. In 2009, industrial production is forecast to contract, while the
trucking sector's revenue will fall by an estimated 23.3% on the previous year. Over
the five years to 2009, industry revenue will contract by 9.2% annually to $14.29
billion. These factors indicate a slow recovery for players in this industry and tough
competition until the economy fully recovers.
9
Potential catalysts for the Trucking Industry
Government contracts, Patents, Release/announcement of new
innovation/technologies. This is a cyclical business so when the economy is good,
the stock is good to have.
Key sensitivities in the Trucking Industry
The price of metals such as steel, the Industrials Production Index which measures
the level of output of the manufacturing, mining, and utility sectors, legislative
compliance requirements.
Key success factors in this industry
Effective cost control, establishment of export markets, a motivated workforce,
access to updated technology, optimum capacity utilization, and a portfolio with
high quality assets.
Cost Structure, Truck & Bus
Manufacturing
Purchases (83%)
Wages (6.9%
Depreciation (4.8%)
Rent (2%)
Utilities (.3%)
Other (1%)
Profit (2%)
Investment Thesis
Fundamental Drivers
Strengths:
Oshkosh’s ability to continue to beat the competition from the
government’s contracts will be a huge driver. Oshkosh's relationship
with the U.S. military dates back more than 80 years, helping the firm
establish itself as a proven supplier. This relationship should bode well
for future contract wins. he FMTV contract alone could be worth up to
$3 billion during the next 10 years. The M-ATV contract guarantees
$1.06 billion in revenue over the next two years. Some optimists
predict more contracts valuing up to $12 billion in the next decade.
Any future additional deployment of U.S. troops will have a positive
impact on the business for Oshkosh.
Oshkosh DARPA Challenge TerraMax™
10
Weaknesses:
As Oshkosh continues to lock down contracts with new
customers, some analysts fear capacity constraints could
become in issue which will directly impact the profitability of
these contracts. It is important that Oshkosh position itself
be able to meet or exceed all orders in a timely fashion or
they risk losing future business.
Potential upset by BAE Systems and Navistar NAV
competitors in the contest for the FMTV contracts may lead
to the loss of future government contracts. In the worse case
scenario, the Government Accountability Office could
recommend awarding the contract to one of these
competitors which would cause loss of future revenue.
The ability to execute profitable acquisitions as a way to
grow market size and product offering. The JLG acquisition
still shows evidence of Oshkosh’s overpayment. Oshkosh
could do much damage to the company in the future by
continuing to pay too much for acquired businesses.
Oshkosh still faces a large debt burden which requires
attention in the near term. This could be burdensome to
innovation if capital has to be filtered to debt.
The access equipment segment is still very exposed to the
U.S. residential construction spending, which is expected to
be weak in the near term.
Investment Thesis
Government Outlays for Defense Procurement
Correlation: .46
New Private Commercial Construction
Correlation: .88, 9 month lag
Business Analysis
In order to assess the drivers of Oshkosh Corporation, it was
necessary to analyze the correlation of Oshkosh’s stock price to
several economic indicators. The below list includes the economic
indicators which had an impact on the OSK stock price. There were
several categories of indicators that could potentially impact the
OSK stock price such as Business Spending, GDP, Government
Spending, Interest Rates, Labor Markets, Prices & Costs, Production,
Trade and Currency, and Transportation.
Oshkosh Correlation to Key Economic Driveres
As you can see on the graph to the right, the range of the
correlations is from .02 (government spending) to .9 (CPI: Gas and
Electricity).
Group
Business Spending
GDP & Contributions
Government Spending
Government Spending
Government Spending
Interest Rates & Money
Labor Markets
Prices & Costs
Prices & Costs
Prices & Costs
Prices & Costs
Prices & Costs
Prices & Costs
Production
Production
Trade & Currencies
Transportation
Economic Indicator
Capital Spending: Industrial Equipment
Nominal GDP
New Public Construction: Highways
Government Outlays for Defense Procurement
Real Government Defense Purchases
Commercial and Industry Loans
Employment
CPI: Gas & Electricity
PPI: Rail Freight
PPI: Construction Machinery
GDP Price Index
Price Producer Index
CPI
Capacity Utilization
Industrial Production
Dollar per Euro
Railroad: Total Intermodal Traffic Origin
Real Government Defense Purchases
Nominal GDP
Correlation Lag (months)
0.60
2
0.33
0
0.85
12
0.70
12
0.02
12
0.76
9
0.41
3
0.90
12
0.89
12
0.84
12
0.72
11
0.52
5
0.45
5
0.58
5
0.37
3
0.81
12
0.66
3
11
Industrial Production
Employment
CPI
Price Producer Index
Capacity Utilization
Capital Spending: Industrial Equipment
Railroad: Total Intermodal Traffic Origin
Government Outlays for Defense Procurement
GDP Price Index
Commercial and Industry Loans
Dollar per Euro
PPI: Construction Machinery
New Public Construction: Highways
PPI: Rail Freight
CPI: Gas & Electricity
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Profitability
Investment Thesis
Tax Rate
Net Margin
Return on Assets
Financial Leverage (Average)
Return on Equity
Financial Ratios
2004
37.30%
4.99%
8.90%
2.28
19.53%
2005
39.30%
5.41%
10.11%
2.1
22.02%
2006
37.30%
6.00%
10.73%
1.99
21.86%
2007
34.20%
4.25%
6.30%
4.59
21.84%
2008
62.00%
1.11%
1.27%
4.38
5.70%
2009
1.70%
-20.75%
-20.26%
9.27
---
2004
2005
2006
2007
2008
2009
17.50%
14.20%
30.80%
17.50%
15.80%
18.90%
84.00%
29.30%
13.20%
30.00%
-25.80%
18.50%
39.60%
18.80%
48.10%
22.20%
22.00%
27.10%
81.10%
39.70%
-31.20%
25.80%
-----
44.90%
21.20%
39.30%
24.10%
26.60%
29.90%
29.70%
32.90%
-70.40%
-0.40%
-----
2005
1.23
0.53
2.1
0
2006
1.14
0.39
1.99
0
2007
1.42
0.74
4.59
2.14
2005
100.00%
16.70%
9.00%
8.80%
2006
100.00%
17.70%
9.50%
9.50%
2007
100.00%
17.50%
9.40%
6.30%
2005
11.1
5.8
16.4
1.9
2006
11.5
5.2
16.1
1.8
2007
9.1
6.9
19.1
1.5
Growth
The following section provides a look at key financial ratios that should be
considered when valuing Oshkosh Corporation.
Profitability
Since businesses create wealth for shareholders by investing capital at a rate of return that is greater
than the cost of capital, return on equity is an extremely important benchmark. Oshkosh has reached
an all time low in FY08 ROE due to a very strong negative trend in operations (pretax return) and a
strong negative trend in non−operating factors. This unfavorable trend in operating performance was
driven by lower asset turnover and lower margin. The productivity of Oshkosh’s assets declined over
the full period. Reinforcing this trend, pretax margin experienced a very strong overall downtrend
that accelerated very sharply from the 2006 level. Non operating factors had a significant negative
influence on ROE. The tax rate was extremely high in 2008. Financial leverage has also accelerated
very sharply since the JLG acquisition in 2006.
Revenue Growth
Year over Year
5-Year Average
Operating Income
Year over Year
5-Year Average
EPS
Year over Year
5-Year Average
Liquidity/Financial Health
Growth
On average , Oshkosh has grown revenues at about 13% per year (excluding JLG) since 2001. During
this time revenue growth has been driven by the high growth in the company’s defense business
(513% increase since 2001) and secondly by the Fire & Emergency business (152% increase since
2001). Over the last decade the Defense segment accounted for ~64% of OSK’s revenue growth. In
addition, OSK’s acquisition of JLG added an incremental $6.76 billion in revenues over the last three
years. Going into the next cycle I expect the company’s Defense segment to continue to drive most of
the revenue growth until we see a recovery in the Access segment core business.
Current Ratio
Quick Ratio
Financial Leverage
Debt/Equity
2004
1.05
0.42
2.28
0.01
2008
1.47
0.74
4.38
1.93
2009
1.29
0.66
9.27
3.94
Margins (% of Sales)
Financial Health
Oshkosh’s financial health has been largely endangered during this economic recession due to a $3.2
billion acquisition of JLG in 2006. JLG is the company’s largest acquisition and was financed with a $3.5
billion credit facility. However, with the addition of several military contracts and ability to pay off
debt and raise equity, Oshkosh was able to vastly improve the balance sheet by the end of FY09.
Margins
Revenue
Gross Margin
Operating Margin
EBT Margin
2004
100.00%
16.10%
8.00%
7.80%
2008
100.00%
16.60%
5.70%
2.70%
2009
100.00%
13.30%
-18.70%
-22.50%
Efficiency
Strong revenue growth helped Oshkosh expand margins to 5.41% in 2006 from 3.42% in 2002. Poor
performance in the firm's refuse truck subsidiary forced down operating margins to 6% in 2008.
Receivables Turnover
Inventory Turnover
Fixed Asset Turnover
Asset Turnover
Efficiency
Oshkosh has show steady improvement in terms of efficiency. This is important since Oshkosh will be
relying on productive inventory to drive margins in the coming fiscal year.
12
2004
10.9
6.2
14.4
1.8
2008
6.9
6.4
16.2
1.1
2009
6.8
5.3
12.3
1.0
Oshkosh FMTV: Best Value for the U.S. Army
Investment Thesis
Income Statement
Fiscal 2009 Review
During fiscal 2009, Oshkosh was severely impacted by the
worldwide recession. Sales for Oshkosh decreased 23.7%
from $7.1B to $5.3B. This was a result of revenue growth in
the Defense segment and share gains at several businesses.
Operating income decreased 66.3% to $207.8 million*. There
was $0.05 EPS from continuing operations* for the year;
driven by $0.63 fourth quarter EPS from continuing
operations. The strengthening of the Defense business was
as a result of M-ATV deliveries to DoD being ahead of
schedule in addition to units already in Afghanistan. Further,
Oshkosh Defense was the winner of the U.S. Army’s FMTV
competition for deliveries from FY11 to FY14. See the box to
the right on how this was won.
Even though Oshkosh Corporation faced a tough economy,
Oshkosh maintained a strong capital structure. By reducing
their debt by $726 million in FY09, executing a $358 million
equity offering in August 09, Oshkosh now has significant
room under financial covenants. As of August 2009, Oshkosh
received a credit rating by S&P to B+/Stable. Oshkosh expects
further reduction in debt in FY10 and is looking forward to
benefits regarding performance based payments for the MATV program.
Fiscal 2010 Outlook
The outlook for 2010 has improved. OSK should see
significant growth in the Defense segment due to M-ATV
related sales and minimal FMTV volume. OSK is predicting
continued weak access equipment and concrete placement
products demand. Weaker municipal spending environment
will have a negative impact on the fire & emergency
segment, but this is considered to be offset by growth in the
access equipment segment. According to the annual report,
Oshkosh anticipates increasing Capital Expenditures from $90
to $100 million. There will be a continued focus on cost
reduction and debt repayment.
The following information was gathered from an investor presentation on how Oshkosh won the FMTV
competition for deliveries from FY11 to FY14
Experienced, capable defense truck manufacturer
FMTV is not a complicated truck for Oshkosh to manufacture – again
Significant excess capacity; JLG capable to cover any M-ATV production overlap, if needed
Ample time in critical path
Extremely low major defects per unit relative to peers
Excellent, very low risk manufacturer
Outstanding reputation building medium and heavy payload vehicles
The tactical wheeled vehicle technology leader
Oshkosh offered a compelling, credible price:
Bid to be profitable
Strong commonality of suppliers between FMTV and FHTV, with Oshkosh’s strong and proven
purchasing power
Experienced, vertical integration creates competitive advantage
80+ year experience in price-based competitions
OSHKOSH CORP
Fiscal Year Ended September 30
Income Statement
#'s in millions
Net sales
Access equipment
Defense
Fire & emergency
Commercial
Intersegment eliminations
NET SALES (Total Consolidated)
Consensus
Total Operating Expense
Opera ti ng Expens e a s % to Revenue
Operating Income
Interest Income (expense)
Other (net)
Net Income Before Taxes
Provision from Income Taxes
Tax %
Net Income After Taxes
Minority Interest
Equity In Affiliates
Net Income Before Extraordinary Items
Basic Weighted Average Shares
Basic EPS Excluding Extraordinary Items
Consensus
Guidance
2011E
2010E
2009
1,139
3697.59
1519.70
600.00
1,139
4930.12
1519.70
600.00
1,139
2594.80
1169.00
590.00
(100)
(39)
(198)
6,857
6,520
8,150
8,480
5,295
2008
3,086
1,892
1,193
1,037
(69)
7,138
2007
2,540
1,417
1,142
1,248
(39)
6,307
2006
$--
2005
$--
1,317
962
1,190
(42)
3,427
2004
$--
1,061
841
1,086
(28)
2,960
2,262
6,171.02
90%
7,334.80
90%
5,087.20
96%
6,557.30
92%
5,717.00
91%
3,101.46
90%
685.67
814.98
208.00
581.00
590.30
325.94
(250.00)
10.00
445.7
169.35
38%
276.31
276.31
(250.00)
10.00
575.0
218.49
38%
356.49
356.49
-213.00
-1188.00
(1,193.0)
-20.00
98%
(1,173.00)
-1173.00
-205.00
-172.00
204.0
118.10
42%
85.90
0.70
6.30
92.90
-201.00
14.00
403.3
135.20
66%
268.10
0.30
7.30
275.70
-7.00
8.00
326.9
121.19
63%
205.75
-0.50
2.28
207.53
-8.00
4.00
263.2
102.27
61%
160.93
-0.57
2.92
163.28
-6.00
4.00
178.4
65.89
63%
112.52
-0.07
2.22
114.67
89.39
3.09
3.02
89.39
3.99
3.93
3.11
89.39
-13.12
74.01
1.07
73.56
3.64
73.16
2.81
71.29
2.25
68.39
1.65
* Figures in text exclude $1.2 Billion of non-cash charges to operating income for asset
impairment in fiscal 2009. This charge is included in the income statement under “other (net)”.
13
2,693
91%
774
600
907
(19)
267.20
2,082
92%
180.41
Investment Thesis
Multiples Valuation:
For this analysis, it was assumed that OSK prices would revert to the
median so the median price was used as the Target Multiple.
Multiples Valuation
When looking at the absolute valuation of Oshkosh, the stock looks
expensive relative to the forward P/E and P/EBITDA multiples. The
P/CF and P/B indicate that the OSK is undervalued and the P/S tells a
neutral story. Overall, the Absolute Valuation averages a Target
Price of $41.30 for Oshkosh which is very close but slightly below
the DCF Target Price of $42.70.
Oshkosh Absolute Valuation
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
Target E,
S, B,
etc/Share
Target
Price
P/Forward E
38.1
2.7
14.8
9.8
14.8
3.99
$59.02
P/S
1.5
0.1
0.6
0.6
0.6
91.17
$54.70
P/B
25.7
0.4
2.8
6.7
2.8
1.51
$4.22
P/EBITDA
13.42
3.93
9.67
6.14
9.67
4.42
$42.74
P/CF
32.8
1.3
12.4
32.8
14
3.27
$45.83
In comparing OSK to the Sector, Industry, and S&P 500, Oshkosh
appears to have components that are both under and overvalued.
The P/E is high relative to the industry and low relative to the Sector
and the S&P 500. The P/S is slightly underpriced relative to the
industry, but overvalued compared to the S&P and Sector.
The average Target Price for multiples valuation: $41.30
Oshkosh vs. Sector Valuation
Oshkosh vs. Industry Valuation
Oshkosh vs. S&P Valuation
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
P/Forward E
3.5
0.3
0.8
0.5
0.8
P/Forward E
2.9
0.28
1.0
2.8
1.0
P/Forward E
3.0
0.22
0.92
0.57
0.92
P/S
1
0.1
0.5
0.7
0.5
P/S
1.6
0.1
0.9
0.7
0.9
P/S
1.0
0.1
0.5
0.6
0.5
P/B
12.8
0.2
0.9
2.6
0.9
P/B
10.1
0.2
1.0
1.9
1.0
P/B
13.1
0.2
1.0
3.0
1.0
P/EBITDA
1.82
0.2
1.01
1.76
1.01
P/EBITDA
2.4
0.24
1.3
1.71
1.3
P/EBITDA
2.25
0.23
1.22
1.69
1.22
P/CF
3.4
0.2
1.1
3.4
1.1
P/CF
3.2
0.2
1.5
3.2
1.5
P/CF
3.1
0.2
1.2
3.1
1.2
14
Sensitivity Analysis
The following two tables demonstrate the sensitivity of the discount
rate and growth rate used. By changing the discount rate, the Target
Price range goes from $31.28 - $48.86. A change in growth rate
changes the Target Price anywhere from $40.19-67.11. This
indicates there is still potential upside to OSK and limited downside
as the discount rate and growth rate are adjusted.
Investment Thesis
Discounted Cash Flow
& Sensitivity Analysis
In addition to a multiples valuation, a discounted cash flow was calculated to
determine a Target Price for Oshkosh Corporation. Several assumptions were
made to create this cash flow statement:
The economy has recovered and will continue to improve
The correct discount rate for Oshkosh is 10.5% and growth rate is 3%
The debt OSK is currently carrying will not impact it’s ability to grow
S e ns it iv it y M a t rix - D is c o unt R a t e
Oshkosh Corporation (OSK)
Analyst: Melissa Hickey
11/20/2009
Year
Revenue
2009
5,295
% Grow th
EBT
EBT Margin
Interest
Interest % of Sales
Taxes
Tax Rate
Net Income
Terminal Discount Rate =
Terminal FCF Growth =
10.5%
3.0%
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
8,150
6,857
7,097
7,345
7,565
7,792
8,026
8,267
8,515
8,770
53.9%
-15.9%
3.5%
3.5%
3.0%
3.0%
3.0%
3.0%
3.0%
575
446
632
661
696
779
883
909
937
965
-22.5%
7.1%
6.5%
8.9%
9.0%
9.2%
10.0%
11.0%
11.0%
11.0%
11.0%
(213)
(250)
(250)
(284)
(294)
(303)
(312)
(321)
(331)
(341)
(351)
-4.0%
-3.1%
-3.6%
-4.0%
-4.0%
-4.0%
-4.0%
-4.0%
-4.0%
-4.0%
-4.0%
(20)
(1,173)
% Grow th
218
169
132
140
149
178
213
220
226
233
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
356
276
216
228
244
290
348
359
370
381
-22.5%
-22.0%
5.6%
7.1%
18.8%
20.2%
3.0%
3.0%
3.0%
-130.4%
G ro wt h
R ate
NP V of
C a s h F lo ws
T e rm ina l
V a lue
NP V of
t e rm ina l v a lue
Im plie d e quit y
v a lue / s ha re
$ 48.86
-1.00%
9.50%
3.00%
$ 2,119
$ 5,573
2249
-0.75%
9.75%
3.00%
$ 2,098
$ 5,367
2117
$ 47.15
-0.50%
10.00%
3.00%
$ 2,078
$ 5,175
1995
$ 45.56
-0.25%
10.25%
3.00%
$ 2,058
$ 4,996
1883
$ 44.08
10.50%
3.00%
$ 2,038
$ 4,830
1780
$ 42.70
0.25%
10.75%
3.00%
$ 2,018
$ 4,674
1684
$ 41.41
0.50%
11.00%
3.00%
$ 1,999
$ 4,528
1595
$ 40.20
0.75%
11.25%
3.00%
$ 1,980
$ 4,391
1512
$ 39.07
1.00%
11.50%
3.00%
$ 1,962
$ 4,262
1435
$ 38.00
2.00%
12.50%
3.00%
$ 1,891
$ 3,813
1174
$ 34.29
3.00%
13.50%
3.00%
$ 1,824
$ 3,450
972
$ 31.28
C ha nge
D is c o unt
R ate
G ro wt h
R ate
NP V of
C a s h F lo ws
T e rm ina l
V a lue
NP V of
t e rm ina l v a lue
Im plie d e quit y
v a lue / s ha re
$ 40.19
S e ns it iv it y M a t rix - G ro wt h R a t e
3.0%
(1,193)
38.0%
C ha nge
D is c o unt
R ate
-1.00%
10.50%
2.00%
$ 2,038
$ 4,220
1555
-0.75%
10.50%
2.50%
$ 2,038
$ 4,506
1660
$ 41.37
-0.50%
10.50%
3.00%
$ 2,038
$ 4,830
1780
$ 42.70
-0.25%
10.50%
3.50%
$ 2,038
$ 5,200
1916
$ 44.23
10.50%
4.00%
$ 2,038
$ 5,627
2073
$ 45.99
0.25%
10.50%
4.50%
$ 2,038
$ 6,125
2257
$ 48.04
0.50%
10.50%
5.00%
$ 2,038
$ 6,714
2474
$ 50.47
152
57
34
35
37
38
39
40
41
43
44
0.75%
10.50%
5.50%
$ 2,038
$ 7,421
2734
$ 53.38
2.9%
0.7%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
1.00%
10.50%
6.00%
$ 2,038
$ 8,284
3052
$ 56.94
502
65
116
(23)
(24)
(25)
(26)
(26)
(27)
(28)
(29)
9.5%
0.8%
1.7%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
2.00%
10.50%
6.50%
$ 2,038
$ 9,364
3450
$ 61.39
(62)
(78)
(61)
35
37
38
39
40
41
43
44
3.00%
10.50%
7.00%
$ 2,038
$ 10,752
3961
$ 67.11
Capex % of sales
-1.2%
-1.0%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
Free Cash Flow
853
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
% Grow th
556
488
192
203
219
264
322
332
341
352
-34.7%
-12.3%
-60.6%
5.9%
7.6%
20.7%
21.8%
3.0%
3.0%
3.0%
The Target Price calculated using DCF is $42.70
15
Investment Thesis
Stock Performance & Dividends
The following table presents the stock prices reflecting actual sales of the Common Stock as reported on the NYSE and dividends paid for
the periods indicated. According to the annual report, Oshkosh suspended the payment of dividends on its Common Stock effective
April 2009. The payment of future dividends is at the discretion of Oshkosh’s Board of Directors and will depend upon, among other
things, future earnings and cash flows, capital requirements, the Company’s general financial condition, general business conditions or
other factors. In addition, the Company’s credit agreement limits the amount of dividends it may pay.
Fiscal 2009
Quarter Ended
High
Low
Fiscal 2008
Dividends
High
Low
Dividends
September 30
$
34.99 $
17.80
—
$
20.95 $
9.05 $
0.10
June 30
$
15.76 $
6.35
—
$
42.59 $
19.75 $
0.10
March 31
$
12.23 $
4.74 $
0.10
$
48.21 $
35.00 $
0.10
December 31
$
13.09 $
3.85 $
0.10
$
63.55 $
44.85 $
0.10
As the 5 year stock price shows chart, from early 2005 until mid 2008,
OSK stock was increasing. As the global credit crisis and recession
became an issue in late 2008-2009, OSK stock price dropped
significantly. This is because the acquisition of JLG had cost the
company a lot of debt and with increasing tightening around the credit
market, the market was concerned with whether or not OSK would be
able to make it’s debt payments. Recently, as government contracts
have become prevalent, OSK stock is rising. I do not anticipate big
future increases because I believe the current stock price includes the
benefits of the military contracts it has received. Further, it is
important to note the three of the five major individual holders of
Oshkosh stock are on the Oshkosh Executive team which implies they
have incentive to act in the best interest of OSK shareholders.
16
5Y OSK Moving Price
Key Risks
Downside






There are several downside risks which must
be considered when evaluating Oshkosh. The
following are the key downside risks for
Oshkosh Corporation.
Defense contract risk: Reduction in U.S. military spending will result in a significant loss of revenue. In addition, The FMTV
contract is still being protested by competitors. Under the formal protest process the government is required to make a
decision by December 14, 2009. And finally, President Obama’s pending decision on the future U.S. involvement in
Afghanistan may provide upside or downside to my estimate.
Debt: OSK continues to carry a heavy amount of debt. This presents a general risk of default which is seen in the company’s
beta of 2.91.
Execution of deliver schedule: The M-ATV contract is a high profile and urgent priority for the DoD, which requires a
significant and rapid increase in the rate of production of these vehicles. If Osk is not able to meet the required delivery
schedule for this contract, our ability to secure future military business may be materially adversely impacted
Integrating acquisitions: Execution risk given the lack of Defense experience at JLG and the company’s leveraged balance
sheet could result in weaker-than-expected earnings and disappointing de-leveraging of the balance sheet. In general,
integrating acquisitions could be costly if not done efficiently.
Slow world economic recovery: This includes sensitivity to state and local budget. The Commercial and Fire & Emergency
segments will likely continue to face tough headwinds as state and local budgets
tend to lag an economic recovery by at least 12 months; as such, these
businesses may not recover as quickly as we are anticipating.
Foreign risk and rate: Oshkosh has a dependency on contracts foreign government agencies in addition to those in the U.S.
which are always subject to risk. Foreign rate adjustments also pose potential risk.
17
Key Risks
Upside




In addition to the downside risks, there are
also several upside risks to Oshkosh as well.
The following are key upside risks which
should be considered for Oshkosh
Corporation.
Defense contract potential: President Obama is expected to make a decision on a strategy for Afghanistan in the near term
so this would provide for a significant increase in troop deployment to Afghanistan. Should he decide that a significant
increase in troop deployment is necessary, it could result in further orders for M-ATVs which will directly impact the top line
for Oshkosh.
Additional contract awards: Additional defense contracts, such as the FHTV program, may be awarded over the next few
months. This also could provide to accelerate top line growth.
Upside to spare parts shipments: The long term impact of spare parts shipments is also correlated to additional contracts.
In addition, given the harsh terrain the U.S. army is exposed to in Afghanistan, there may be upside in the number of spare
parts required to maintain the M-ATV’s Oshkosh has shipped.
Quick world economic recovery: Sooner-than-expected economic recovery will have an immediate positive impact on all
segments, especially the construction segment . Until the economic recovery arrives, Oshkosh construction will still
struggle.
18
Recommendation
My recommended action is to HOLD Oshkosh Corporation.
By weighting my valuation 75% to the DCF and 25%
Multiples, the Target Price is $42.35 which presents an
upside of approximately 11.54%.
Key Risks
Defense contract risk
Reduction in U.S. military spending will result in a
significant loss of revenue
Protests by competitors for recently won
contracts may pose risk
Obama’s pending decision on the future US
involvement in Afghanistan
OSK continues to carry a heavy amount of debt,
inherent risk of default
Execution of current delivery schedule
Integrating acquisitions could be costly if not done
efficiently
Slow global recession recovery
Foreign risk and rate adjustments
Key Drivers
Global leader in specialty vehicles
Top brands and leading market share in our key
markets
Innovation leader / technological advantages
Improved near term outlook
Solid near-term outlook for defense
Long-term growth expected for access equipment
Reduced cost structure for improved profitability
Superior distribution and service network with longstanding
customer relationships
Strong and improved capital structure
Significant room under financial covenants
Track record of significant free cash flow
Proven, experienced management team
19
Resources
Websites:
Oshkosh Corporation, http://www.oshkoshcorporation.com
IBIS World Industry Reports: Truck & Bus Manufacturing in the US: 33612, August 13, 2009 , http://www.ibisworld.com/industry/default.aspx?indid=818
Wall Street Journal Online , http://online.wsj.com/quotes/key_facts.html?mod=2_0470&symbol=OSK&news-symbol=OSK
Yahoo Brand Edgar-Online, http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=6253244-180987-202266&type=sect&dcn=0000897069-08-001739
Yahoo Finance, http://finance.yahoo.com/q?s=osk
About.com – Economic Indicators, http://economics.about.com/cs/businesscycles/a/economic_ind.htm
Morningstar, http://www.morningstar.com/
Bloomberg.com, http://www.bloomberg.com/apps/news?pid=20601068&sid=aoD4vl4j6Kg4
R.W. Baird Investor Presentation, November 11, 2009, http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9MzU4ODcxfENoaWxkSUQ9MzUxNDAwfFR5cGU9MQ==&t=1
Hoover.com Truck and Bus Manufacturing Industry Report, http://hoovers.com/truck-and-bus-manufacturing/--ID__326--/free-ind-fr-profile-basic.xhtml
Other:
FY08 & FY09 Oshkosh Annual Report
J.P. Morgan Initiation Report, November 23, 2009
Morningstar Q4 Outlook, September, 30 2009
Thomson Baseline
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