Recommendation:
November 27, 2007
BUY
Oshkosh Truck Corp. (OSK)
Investment Thesis
Analyst: Ken Melick
Fisher College of Business
The Ohio State University
Columbus, OH
Contact: 513.850.4432
melick.20@osu.edu
Oshkosh Truck Corporation is a leading manufacturer of
specialty vehicles and bodies reporting in four primary business
segments: Defense, Access Equipment, Fire & Emergency and
Commercial. In fiscal 2007, Oshkosh Truck reached $6.3 billion
in sales and delivered an 11th consecutive year of improving
financial results. Oshkosh is poised for continued strong
performance.
Fund: OSU SIM Class (Bus Fin 824)
Fund Manager: Royce West, CFA
Summary
I have assigned a one year price target of $67 to shares of OSK.
The following are key assumptions supporting this estimate:
¾ Growth in the Defense segment will continue at a robust
pace until 2010. In FY2008 the U.S. Department of
Defense plans on ordering 3x FY2007 levels of Oshkosh
Heavy Tactical Vehicles. The process of recapitalizing
existing vehicles will also begin to take place and will
last through 2010.
¾ Recently completed acquisition of JLG gets the
Company a more diverse and profitable product line-up
while reducing Oshkosh’s exposure to the slowing
domestic economy.
¾ Access Equipment segment will be able to continue
improving operating margins.
¾ Three standard valuation methods (Multiples Analysis,
Comparable Multiples and Discounted Cash Flow)
support this valuation and all suggest the intrinsic value
of OSK shares is 35-45% above the current price.
Sector: Industrials
Industry: Heavy Duty Trucks & Parts
Key Data
Price Target ($)
Share Price ($)
Market Cap ($ mn)
Dividend Yield (%)
Net Margin (%)
Debt/total capital (%)
52 Week High ($)
52 Week Low ($)
Current
67.00
46.31
3,435.0
0.9
4.2
68.7
65.83
46.09
Key Risks
U.S. defense budget cuts and a weaker global economy
Price Performance (2 Yrs)
Relative Strength vs. Industrials (2 Yrs)
Table of Contents
Investment Thesis
Summary
Key Risks
1
1
1
Company Overview
Defense
Access Equipment
Fire & Emergency
Commercial
3
4
4
4
5
Macroeconomic Analysis & Sector Implications
5
Industry Analysis
Federal Reserve
Oshkosh Truck’s Position in the Industry
7
8
9
Growth Drivers & Catalysts
Defense
Access Equipment
Fire & Emergency
Commercial
Acquisitions
10
10
11
12
12
13
Risks
13
Financial Analysis
DuPont Analytics
14
14
Valuation
Multiples Analysis
Comparables Analysis
Discounted Cash Flow Model
15
15
16
17
Conclusion
19
Appendix A – Balance Sheet
Appendix B – Income Statement
Appendix C – Cash Flow Statement
Appendix D – Projected Income Statement
Appendix E – Discounted Cash Flow Model
20
21
22
23
24
2
Company Overview 1
Oshkosh is a leading designer, manufacturer and marketer of specialty vehicles and
vehicle bodies. The company has built leading positions within its set of businesses
including #1 market leading positions in heavy military trucks, U.S. and European
Fire Rescue vehicles and U.S. concrete mixers. Oshkosh operates in four segments –
Defense, Access Equipment, Fire & Emergency, and Commercial. The company’s
four primary end markets are non-residential construction, defense, residential
construction and trucks.
Exhibit 1: Revenue fairly balanced
2008E Oshkosh sales by segment
Exhibit 2: Profits are concentrated in
Access Equipment & Defense
2008E Oshkosh EBIT by segment
Defense
26%
Access
Equipment
40%
Defense
35%
Access
Equipment
43%
Commercial
8%
Commercial
17%
Fire &
Emergency
14%
Fire &
Emergency
17%
Exhibit 3: Concentrated geographically
2007 Oshkosh sales by region
EAME
13%
Exhibit 4: Becomes more diverse with
JLG acquisition
2008E Oshkosh sales by region
Other
6%
Other
5%
EAME
21%
U.S.
73%
U.S.
82%
Source: Investor Presentation
1
Source: Investor Presentation
Adapted from Oshkosh Truck’s 2007 10-K
3
Defense
Oshkosh Trucks has sold products to the U.S. Department of Defense for over 80 years
and has a proven track record as a reliable, quality supplier. The Company’s military line
of heavy-payload tactical trucks includes the Heavy Equipment Transporter, the
Palletized Load System, the Common Bridge Transporter and the Logistic Vehicle
System. Oshkosh is also a manufacturer of severe-duty, medium-payload trucks for the
U.S. Marine Corps. In 2005 Oshkosh launched the Medium Tactical Truck to offer a line
of lower-cost severe-duty, medium-payload trucks suitable for less demanding
requirements. The Company also exports severe-duty-heavy-and medium-payload
tactical trucks to approved foreign customers. For example, Oshkosh was recently
awarded a contract by the Egyptian Ministry of Defense to deliver 35 Heavy Equipment
Transport military vehicles along with 35 trailer kits, training services and support.
Oshkosh operates under a one-year, renewable Family of Heavy Tactical Vehicles
(FHTV) requirements contract with the DoD. The current contract expires in February
2008 and management is currently in negotiations to renew this contract for an additional
year. As a result of the significant usage of the Company’s heavy-payload trucks in
Operation Iraqi Freedom and the Company’s performance under the initial contract, the
Company was awarded a five-year follow-on contract in September 2004 to rebuild
Oshkosh heavy-payload defense trucks and trailers deployed in Iraq.
Access Equipment
In December 2006, through its JLG acquisition, Oshkosh became a leading worldwide
manufacturer of a wide range of aerial work platforms, telehandlers, scissor lifts and
vertical masts used in a variety of construction, industrial, institutional and general
maintenance applications to safely and efficiently position workers and materials at
elevated heights that might otherwise require scaffolding, ladders or cranes. The
Company also designs, manufactures, and sells Caterpillar-branded telehandlers under a
20-year strategic alliance entered into in October 2005.
Fire & Emergency
Through the Pierce brand, Oshkosh is a leading manufacturer of fire apparatus assembled
on custom chassis, designed by Pierce to meet the special needs of firefighters. Pierce
also manufactures fire apparatus assembled on commercially available chassis, which are
produced for multiple end-customer applications. The Company offers a full line of
custom and commercial fire apparatus and emergency vehicles including pumpers, aerial
and ladder trucks, tankers, light-,medium and heavy duty rescue vehicles, wildland rough
terrain response vehicles, mobile command and control centers, bomb squad vehicles and
hazardous materials control vehicles. Pierce primarily serves domestic municipal
customers, but also sells fire apparatus to airports, universities and large industrial
companies, and in international markets.
4
Other brands include; JerrDan, a manufacturer of towing and recovery trucks and
equipment; BAI, which produces emergency vehicles and snow removal vehicles for use
in the airline industry; Medtec, a manufacturer of custom ambulances for private and
public transporters; OSV, manufactures mobile medical vehicles.
Commercial
Through McNeilus and the Geesink Norba Group the company is a leading North
American and European manufacturer of refuse collection vehicles for the waste services
industry. The Company is also a leading manufacturer of front- and rear-discharge
concrete mixers and portable and stationary concrete batch plants for the concrete readymix industry throughout North America. Through IMT, the Company manufactures field
service vehicles and truck-mounted cranes for the construction, equipment dealer,
building supply, utility, tire service and mining industries.
Macroeconomic Analysis & Sector Implications
Given the inherent cyclicality of the Industrials sector it is important to study the current
economic environment for any signs that the steady growth we have enjoyed for the past
five years may be slowing. Any apparent signs that the economy may go into a recession
would put immediate pressure on economically sensitive sectors, especially Industrials.
Several economic data points that are useful for gauging the health of the economy and
Industrials sector are: Industrial Production, Capacity Utilization and the ISM Purchasing
Managers Index.
Exhibit 5 shows the Industrial Production Index (IPI) sequential quarter growth for the
past 20 years. The IPI is an economic indicator released by the Federal Reserve Board
each month. The index measures the amount of output from the manufacturing, mining,
electric, and gas industries. If the index is growing quarter/quarter than that indicates
companies within the Industrial sector are performing well. Since 2002 there have only
been six instances where the index did not grow from quarter to quarter and each
negative dip has only lasted one quarter. In the most recent quarter the index grew
slightly less than 1%, which is in-line with historical averages through periods of
economic expansion. This indicates a healthy economy and an environment conducive to
growth within the Industrial sector.
5
Exhibit 5: Industrial production growth remains strong
Index of industrial production
Source: Factset
Exhibit 6 displays the U.S. Capacity Utilization rate. This measure, released by the
Federal Reserve Board, shows the percent of plants and equipment in the U.S. that are
actually being utilized. If this measure is rising then it indicates that the economy is
expanding. Capacity utilization has been steadily increasing since the last recession, but
is still off of the historic highs seen in the past 20 years, indicating that there is still room
for this measure to improve further. Another important indication that can be gleaned
from this data is the pricing power that companies within the Industrial sector have. If
capacity is tight, then companies will have an easier time passing price increases through
to their customers.
Exhibit 6: Robust demand driving capacity utilization rates higher
Capacity utilization rate for manufacturing companies
Source: Factset
6
The Institute of Supply Management’s (ISM) Purchasing Managers Index (PMI) for the
past 20 years is shown in Exhibit 7. This index is created by surveying 300 purchasing
managers from different U.S. industrial companies. It obtains their opinion on five major
indicators: new orders, inventory levels, production, supplier deliveries, and the
employment environment. A PMI above 50 indicates expansion in the manufacturing
sector. The most recent reading was 52, indicating a current economic environment
suitable for continued growth in the Industrial sector.
Exhibit 7: Manufacturing sector is in a period of expansion
ISM Purchasing Managers Index
Source: Factset
Industry Analysis
Oshkosh Truck fits into Heavy Duty Trucks & Parts industry group. Some of the largest
companies in this industry group include: Paccar, Volvo, Spartan Motors, and Federal
Signal. All of these companies produce large trucks used for commercial purposes.
Federal Signal competes directly with Oshkosh’s Fire & Emergency segment by
producing fire rescue apparatus including pumpers and tankers. When assessing future
out-performance prospects for this industry group, and thus Oshkosh, it is important to
analyze the industry’s performance during different economic cycles as determined by
analyzing the Federal Reserve’s adjustments to the Federal Funds Rate. It is also equally
important to assess Oshkosh Truck’s position within the industry and specific factors that
will drive its growth in the future.
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Federal Reserve
So far this year the Federal Reserve has lowered the Federal Funds Rate by 75 basis
points. They cited slowness in the American economy and turmoil in the financial
markets as the reason for the two easings in each of their past two meetings. In each of
the past two meetings the market had fully expected easings by the Federal Reserve.
However, the Fed’s last statement accompanying the rate cut announcement indicated
that they believe the risk of slowing economic growth is currently balanced with the risk
of increasing inflation. From this statement I believe that while the Fed may cut rates one
more time in December, it is unlikely that we will see additional rates cuts in the first half
of 2008, unless future economic data indicates that the economy is slowing more than the
Fed expects. Exhibit 8 shows the area of the business cycle I believe we are in, based on
actions by the Federal Reserve, and the asset classes that have historically performed best
in this environment.
Exhibit 8: Economy currently in the midst of a mid-cycle slowdown
General business cycle as it relates to the Fed’s adjustments to the Federal Funds rate
Extensive research has been done to show which industry groups perform best during
periods of Fed rate hikes, rate cuts and the interim period between the last rate cut and the
first rate increase. Given the uncertainty as to whether the Fed will continue to cut rates
or whether we are in the interim period, it is useful to see how the Heavy Duty Trucks &
Parts industry has fared in each of these periods.
Research done by investment firm, Bernstein, in January of 2001 shows the relative
returns of different industries compared to the S&P 500 during periods of Fed rate cuts.
While some cyclical groups have performed poorly, such as commodities and transports,
8
the capital goods group, which includes Heavy Duty Trucks & Parts, has outperformed
the S&P 500 by an average of 1.7%.
Bear, Stearns & Co. did similar research in 2002 that shows what industry groups
performed best during the interim period between the last Fed rate cut and the first rate
increase. The performance of the Heavy Duty Trucks & Parts industry group is even
more impressive in this stage. Historically the industry group has outperformed the S&P
500 by 5% during these time periods.
While it is unclear what the Federal Reserve’s next move will be, investors should feel
secure knowing that this industry group has performed well in either stage of the business
cycle that we might possibly be going through.
Oshkosh Truck’s Position within the Industry
Oshkosh has a unique position within the industry. Whereas companies like Paccar and
Volvo may sell a large portion of their products directly to other industrial companies,
Oshkosh obtains a significant amount of their revenue and earnings from the government
through their Defense segment. This puts Oshkosh in a unique and advantageous
position. Because government defense spending is not related to the health of the U.S.
economy, Oshkosh will continue to have success in this segment regardless of whether or
not the economy slows down. Exhibit 9 shows the amount of money spent by the U.S.
government on the Army and as this amount has increased so have Oshkosh’s Defense
sales. Since the government is expected to increase their spending on the Army in 2008,
Oshkosh should see increased sales in their Defense segment.
Exhibit 9: Oshkosh Defense sales to accelerate in 2008
OSK Defense sales vs. Government spending on the U.S. army
U.S. Army spending
OSK Defense Sales
$2,500
$2,000
$1,500
$1,000
$500
$0
1999
2000
2001
2002
2003
Source: Company data and Goldman Sachs Research
9
2004
2005
2006 2007E 2008E
Growth Drivers & Catalysts2
Given the segmented operations of Oshkosh Trucks it is important to analyze each
segment individually to determine what will cause each segment to out-perform or to
what factors will cause a segment to become a drag on the Company’s growth. The two
best performing segments are Defense and Access Equipment. The Defense segment is
set to outperform by increasing their production for the U.S. government and the Access
Equipment segment is set to outperform due to increased international sales and margin
improvement. Fire & Emergency and Commercial will continue to show below trend
growth as a result of a slowdown in the economy. In addition, management has
demonstrated a strong ability to make quality acquisitions to fuel Oshkosh’s growth.
Defense
I believe the reason for the recent sell-off in OSK shares is a result of market expectations
that spending by the U.S. Department of Defense will soon slow to more normal levels as
Operation Iraqi Freedom winds down. However, the market is pricing in a slowdown
quicker than what will actually occur. Investors would have significant reason to worry
if this were to actually be the case. The war in Iraq has helped to fuel the 121% increase
in the Defense segment’s sales since it began in 2003. Obviously a rapid reduction in
military spending on the war would negatively impact the segment. On the contrary,
recent developments do not support this case.
The Department of Defense is planning a three-fold increase in the deployment of
Oshkosh’s trucks within their Family of Heavy Tactical Vehicles (FHTV) in 2008
(approximately 45% of the Defense segment’s sales). Management expects the Defense
segment to see revenue growth of 20% in 2008. In my DCF model I factored in Defense
growth of 32% for two reasons. First, management has historically been conservative
when estimating the growth of this segment (Exhibit 10) by an average of 15% since
2003. Second, because the Defense segment’s business is contract driven as opposed to
being based on government production plans, it is often hard to pin down exactly how
much business will be given to Oshkosh and this uncertainty causes management to give
conservative guidance.
Exhibit 10: Guidance has been consistently conservative since beginning of Iraq war
Oshkosh Defense sales vs. initial management guidance
Initial Guidance
Actual Sales (millions)
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
2003
2004
2005
2006
Source: Company data, Goldman Sachs Research
2
Oshkosh Truck Corp. – Goldman Sachs Research, 2 October 2007
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After this surge in 2008 I expect the Defense segment’s growth to moderate to 10% in
2009 when U.S. activities in Iraq begin winding down. However in 2009, when this
slowdown does occur, Oshkosh will again be called upon to maintain and repair their
vehicles that are currently deployed in Iraq. This should keep growth in this segment
going for at least an additional 12 months. If the U.S. maintains its force in Iraq past
2009 then this would provide upside to my model.
There is one major catalyst that, if it were to occur, would give significant upside to my
Defense segment growth estimates. The Department of Defense currently has plans to
purchase 6,400 mine-resistant ambush protected (MRAP) vehicles for deployment in
Iraq. Several companies have already announced large contracts for their own MRAP
vehicles including Force Protection and General Dynamics. Oshkosh has partnered with
two other defense companies, Ceradyne and Ideal Innovations, to produce “the Bull.” It
has delivered the prototype to the government for testing and no decision has yet been
made as to whether or not Oshkosh will be awarded a contract for their MRAP vehicle.
Access Equipment
In December 2006 Oshkosh bought JLG for $3 billion in cash and debt. JLG is a market
leader in aerial access equipment. This acquisition will give Oshkosh access to the
rapidly growing international infrastructure build-out. I am forecasting 8% growth in this
segment due to an expected slowdown in North American sales. This is due to the
expectation that equipment rental companies are going to reduce their capital spending by
almost 15% in 2008. However, growth outside of North America is expected to remain
robust with at least 15% growth in 2007. International growth is being fueled by large
government surpluses in Asia and the Middle East. Also, this higher mix of international
sales is a positive for the segment as the product mix sold overseas tends to have higher
margins. For example, telehandlers, which have low margins, are a larger portion of the
product mix sold in North America than overseas.
The main driver of growth in this segment going forward will be margin improvements.
Operating margins at JLG are currently about 10-11%. Its primary competitor, the Genie
subsidiary of Terex, has margins of almost 20%. JLG should begin to move closer to
these margins by shifting to higher margin products, reducing manufacturing efficiencies
and better utilizing their large scale across all of their processes. To account for these
improvements I factored in gradually improving margins for this segment for 2008
(11.5%) and 2009 (12.0%). Exhibit 11 shows the significant progress JLG has already
made since 2001.
11
Exhibit 11: Margin improvement initiatives already taking shape
Access Equipment historic and forecasted operating margins
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2001
2002
2003
2004
2005
2006
2007E 2008E 2009E
Source: Company Data, Goldman Sachs Research
Fire & Emergency
After the acquisition of Pierce in 1996 Oshkosh’s Fire & Emergency segment has
achieved an 11% organic CAGR. Pierce is approximately 55% of Fire & Emergency
sales. Within this segment many brands have increased market share in each of their
respective markets. For example, when Pierce was acquired in 1996 they held 20% of
the market for fire rescue pumpers and by 2006 that market share had improved to 33%.
Margins in this segment have historically been lower than the rest of Oshkosh given the
competition that exists in the fire and emergency vehicles market. Also, this segment
spends 3% of revenue on R&D, which is higher than the average for the rest of Oshkosh
(1.2%). This higher spending on R&D has been an important driver of the market share
gains won by the Fire & Emergency segment.
I am forecasting sales growth of 6% for 2008, which is in-line with management’s
guidance and takes into account a slowing U.S. economy. U.S. sales account for 95% of
this segment’s revenue.
Commercial
The Commercial segment has recently been the worst performing segment within
Oshkosh and will likely continue to show lackluster growth for the near future.
Fortunately, it is also the smallest segment within Oshkosh, accounting for 17% of 2008E
revenue and only 8% of 2008E EBIT. My forecast is for -1% revenue growth in 2008,
which is in-line with management’s guidance, and no growth in 2009 as a result of the
slowing construction markets.
The Company has had some recent success. In 2002 they launched the rear-discharge
Revolution concrete mixer drum and in 2006 they launched the front-discharge version.
This concrete drum is the first and only composite drum ever produced (all other drums
are made with steel). The Revolution drum offers greater concrete payload per vehicle
and longer drum life, which lowers the cost per yard of concrete delivered. Oshkosh
offers the Revolution as a premium priced product and has seen great adoption rates due
12
to the quick payback to customers through lower operating costs. To date the Company
has sold 2,000 drums. The sale of these drums has been slower than expected due to
problems with the technical design and the production process. Management now
believes those issues have been resolved and the production process can be ramped up to
meet the demand for the Revolution drum. If this ramp-up process moves at a rate
quicker than management expects, then that would add upside to my model.
Acquisitions
Since 1997 Oshkosh has generated a return of 12% on their invested capital, while at the
same time growing their invested capital at a 32% CAGR. This is well ahead of the peer
group average. Seven of Oshkosh’s largest acquisitions account for approximately 50%
of 2007 earnings. Management has established a strong track record for making quality
acquisitions. They have successfully acquired and integrated 15 companies over the last
11 years, which has helped to contribute to the 35% CAGR in operating income over the
last 10 years. For example in 2008, Pierce, McNeilus and Jerr-Dann are all forecasted to
show 14-30% returns on capital from their original purchase price.
The current management team has been with Oshkosh for over 15 years on average.
During that time they have grown Oshkosh by establishing many diverse product lines,
distribution networks and established a wide geographic footprint. When many of them
began in 1997 sales were only $700 million. Today sales are over $6 billion.
Risks
Oshkosh Trucks faces a number of risk factors that could adversely affect the Company’s
performance and have a negative impact on their stock price.
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Oshkosh is a cyclical company and their performance relies heavily on a strong
U.S. and global economy. Any slowdown greater than what is currently expected,
and especially a recession, would cause many of my growth estimates to prove
too optimistic.
A heavy reliance on domestic growth. Of 2008E revenue 73% is expected to
come from the U.S. This does not give Oshkosh significant exposure to the
international infrastructure boom and more rapidly expanding economies.
However, the acquisition of JLG will help to give the company more international
exposure than it has had in the past.
A reduction in spending by the U.S. Department of Defense. 35% of 2008E EBIT
comes from the Defense segment and the DoD is the primary customer. If
Operation Iraqi Freedom were to not last as long as expected, then that would
negatively affect the Defense segment.
Inability to fully integrate the JLG acquisition. This $3 billion acquisition is very
significant for Oshkosh considering the market cap of Oshkosh is only $3.5
billion. However, in their most recent quarter JLG was more accretive than
management had expected.
13
Financial Analysis
Located at the end of this report (Appendix A-C) are Oshkosh Truck’s financial
statements dating back to 2002.
Looking at the balance sheet, the biggest change is the large increase in long-term debt to
$3 billion when historically long-term debt has been minimal. This is a result of the debt
Oshkosh took on to acquire JLG. While this is a very large increase, it should be
manageable given the Company’s strong cash flow. Also, the Company’s liquidity ratios
still look healthy. The current ratio is 1.4, which is higher than the historical average of
1.1. EBIT/Interest Expense is 3.0, which is significantly lower than it has been
historically, but still shows that the Company can service its temporarily high debt level.
In general, most balance sheet accounts are significantly higher in FY07 than in FY06
due to the large acquisition of JLG.
The income statement is quite impressive. Since 1997 revenue, operating income, and
EPS have had CAGRs at 25%, 35%, and 38% respectively. All of this growth has been
fueled by several factors including: increased international exposure, strong defense
spending, cost reductions, and acquisitions made possible by strong free cash flow.
Oshkosh has historically been able to generate high levels of cash. Their largest source
of cash has come from operating activities. In FY07 the Company generated more than
$400 million in cash from operations and cash flow from operation has been positive for
9 out of the last 10 years. The Company has typically had negative cash flow from
investing activities since they make frequent acquisitions and have to spend to maintain
their property, plant, and equipment. Cash flows from financing have been mixed over
the last 10 years. Recently, cash flow from financing was approximately $2.9 billion as
the Company borrowed to buy JLG. Oshkosh has also always paid a dividend.
DuPont Analytics
A DuPont Analysis is a quick way to summarize the efficiency of the income statement
through profitability and the efficiency of balance sheet by analyzing activity levels. The
profitability measure assesses the operating performance of a company by looking at
margins. The activity measure shows how efficiently a company utilizes its resources
prior to financing costs and tax expenses. These two measures combine to show a
company’s Return on Equity. Exhibit 12 shows the data and calculations made in a
DuPont analysis.
14
Exhibit 12: Return on Capital Employed Improving
DuPont Analysis Summary
9/2007
Asset Turnover
1.48
x Pretax Income Margin
6.4
= Pretax Return on Assets
9.5
x Tax Rate Complement (1-Tax Rate)
66.5
= Return on Assets
6.3
x Equity Leverage (Assets/Equity)
4.59
= Return on Equity
21.8
x Earnings Retention (1-Payout)
89.0
= Reinvestment Rate
19.4
Source: Company Data, Factset
9/2006
1.79
9.5
17.1
63.0
10.7
1.99
21.9
86.9
19.0
9/2005
1.87
8.9
16.6
61.1
10.1
2.10
22.0
90.0
20.2
9/2004
1.78
7.9
14.1
63.1
8.9
2.28
19.5
91.9
17.8
9/2003
1.83
5.9
10.7
67.1
7.2
2.09
16.3
92.9
14.8
The Asset Turnover and Return on Asset measures are slightly lower than historical
averages, but this does not necessarily mean Oshkosh is operating any less efficiently
than it has in the past. This reduction is primarily due to the large acquisition of JLG.
The Company used nearly $3 billion in debt to buy JLG and has caused returns on assets
to be lower in FY2007 due to the large interest expense burden. However, the
Company’s Return on Capital Employed remains close to an all-time indicating that
Oshkosh management is still able to acquire and integrate quality assets. I estimate that
the Company will return to more historical asset turnover and ROA characteristics as
their high levels of free cash flow allow them to pay off the increased debt load.
Valuation
There are several ways to value shares of Oshkosh Trucks including: Multiples Analysis,
Comparable Analysis and a Discounted Cash Flow model.
Multiples Analysis
The first step in my multiples analysis is to compare Oshkosh Trucks to the entire
Industrials sector to determine if it is over or undervalued relative to its sector (Exhibit
13).
Exhibit 13: OSK relatively cheap compared to the Industrials sector
OSK valuations relative to the Industrials sector
Stock vs. Sector
Valuation
P/Forward E
P/S
P/EBITDA
P/CF
P/E/G ratio
High
Low
Mean
Current
1.20
0.91
1.60
1.61
0.90
0.39
0.12
0.29
0.38
0.45
0.88
0.41
0.78
1.00
0.64
0.77
0.51
0.78
1.24
0.48
Source: StockVal
15
OSK looks cheap on this basis. The P/Forward E is significantly lower than it has been
historically. Also, the PEG ratio is much lower than it has been. This indicates that the
market has not taken into account the level of growth that OSK can produce. It looks
expensive by the P/S and P/CF but this is likely due to the large acquisition of JLG that
OSK completed this year. The increases in sales and cash flow have not fully occurred as
of today and the market has taken that into account. In general, OSK shares should
warrant a premium versus the sector given that Oshkosh is expected to grow at 20.0%
while the sector is only expected to grow at 12.4%. This relatively low valuation
indicates that there is potential for current multiples to expand. This step of the analysis
helps to put into perspective the absolute valuation of Oshkosh. It gives a basis for
assigning multiples and acts as a reasonability check.
I then assessed the current multiples of OSK shares and compared them to the historical
highs, lows, and means. I assumed that all of the multiples would return to the mean
(Exhibit 14) and then I took the arithmetic average of the implied share prices to come up
with a target price of $63.82. This is likely a conservative assumption given the
favorable factors offered by the JLG acquisition. First, JLG gives Oshkosh more
exposure to international economies, which are growing significantly faster than the U.S.
Second, margins in the JLG business are approximately 10%, which is higher than the
historical average for the company. Also, tax rates in foreign countries tend to be lower
than in the U.S., which will bring down the amount of tax Oshkosh pays and make the
Company more profitable.
Exhibit 14: Multiples should at least revert to their historical means
Multiples Analysis
Absolute
Valuation
High
Low
Mean
Current
Target
Per
Multiple Share
Target
Target
Price
P/Forward E
P/S
P/EBITDA
P/CF
P/E/G ratio
Average
26.50
1.46
17.90
21.20
1.30
7.70
0.20
2.90
5.30
0.60
14.80
0.59
7.10
11.90
0.90
12.30
0.80
6.70
16.10
0.60
14.80
0.59
7.10
11.90
0.90
69.41
57.91
61.63
42.96
87.23
63.82
4.69
98.15
8.68
3.61
96.92
Source: StockVal
Comparables Analysis
For the comparables analysis I looked at each segment within Oshkosh and assigned it an
EV/EBITDA multiple based on the same multiple for companies that have comparable
business operations to each respective segment (Exhibit 15). I factored in a 5% premium
for the Defense and Fire & Emergency segments to account for their superior growth
rates and market leading positions compared to their competitors.
16
Exhibit 15: Oshkosh trades at a discount on a sum-of-the-parts basis
Sum-of-the-parts analysis for Oshkosh based on 2008E EV/EBITDA
Comparable companies
EV/EBITDA
Defense
Alliant Tech
Ceradyne
Force Protection
General Dynamics
Lockheed Martin
Northrop Grumman
Raytheon
Average
9.1
8.0
8.2
9.2
8.4
8.4
11.0
8.9
Target
Premium
OSK segment target valuation
Segment Target
2008E
Implied Enterprise
Multiple
EBITDA
Value
5%
9.3
329.0
Equity Value
Per Share
$3,074
$41.10
Commercial
Dover
Paccar
Terex
Average
8.8
8.6
7.1
8.2
0%
8.2
72.9
$595
$7.96
Fire & Emergency
Federal Signal
Paccar
Average
7.7
8.6
8.2
5%
8.6
127.0
$1,087
+
$14.53
Access Equipment
Caterpillar
Manitowoc
Terex
Average
8.2
8.8
7.1
8.0
+
+
0%
8.0
362.1
$2,909
$38.89
-
Net Debt
$40.65
=
$61.83
34%
Sum of Parts Target
Implied Upside
Source: Company Data, Factset, Goldman Sachs Research
Discounted Cash Flow Model
The DCF model (Appendix E) is the most comprehensive valuation tool discussed in this
report. It allows the user to input and assess a wide range of assumptions. It reduces the
amount of ambiguity of looking at past multiple averages, which do not account for
changes in a company’s business model. A comparable company analysis compares the
company to competitors that are not exactly similar to each individual business segment.
However, they do provide good reasonability checks. Using the DCF model I have
calculated a target price of $67. While constructing this model I used the following
assumptions:
Income Statement
ƒ I followed the sales and margin estimates discussed in the Growth and Catalysts
section along with management estimates.
17
ƒ
Interest expense is expected to decrease by 0.1% each year starting in 2010 as
the Company pays off its debt it used to acquire JLG.
ƒ The tax rate is expected to be 30%. This approximates the historical average
and accounts for expanding international operations, which carry a lower tax
rate.
ƒ Non-operating income is expected to be at 0.1% of sales, which is slightly below
the historical average.
Balance Sheet
ƒ Accounts Receivable, Accounts Payable and Inventories have been stable
historically and the levels used in the model are consistent with those trends.
ƒ A higher debt level is the basis for the elevated interest expense.
ƒ Depreciation is expected to remain steady and follow the historic trend.
Cash Flow
ƒ Depreciation and capital expenditure levels are in-line with near-term
expectations and are set to become the same percentage of sales over time.
The discount rate used is 10%, which is reasonable given the inherent risks in a cyclical
growth company. The terminal discount rate is 5%, which is approximately long-run
GDP growth (3%) plus long-run inflation (2%).
Exhibit 16 shows the differences between my estimates and consensus estimates for
revenue and diluted EPS. Management guidance is also shown for revenue in FY2008.
My estimates are slightly lower than each of the other estimates. This is due to my belief
that residential construction is set to remain slow for longer than expected. I am also
accounting for the risk that the JLG acquisition may not be as accretive as quickly as
expected due to the fact that management has not ever completed an acquisition of this
magnitude. Their estimates may be slightly too optimistic.
Exhibit 16: Estimated Revenue and Diluted EPS slightly lower than expectations
Revenue and Diluted EPS vs. Management and Consensus expectations
Revenues
Management Guidance
Consensus
Estimated Sales
2008
$7.1 - 7.3 billion
$7.4 billion
$7.0 billion
EPS (Diluted)
2008
Consensus
$4.72
Estimated EPS
$4.39
Source: Company Data, Wedbush Morgan Research
2009
N/A
$7.9 billion
$7.3 billion
2009
$5.36
$4.79
18
Conclusion
I am rating shares of Oshkosh Trucks a BUY with a price target of $67.
I believe that shares of Oshkosh are currently undervalued by the market for several
reasons. First, the market may be pricing in a rapid and significant slowdown in the
Defense segment as Operation Iraqi Freedom becomes increasingly unpopular and
presidential candidates reveal their plans for troop withdrawals. However, this is not
what recent developments tell us. The U.S. Department of Defense is planning a three
fold increase in orders of trucks from Oshkosh’s FHTV segment. Also, even when the
war ends there will still be significant need to recapitalize the vehicles and equipment that
have been used during the war.
Second, the market may be discounting the shares due to the exposure to the residential
construction market. However, the Company’s primary exposure to this segment of the
economy is primarily through the Commercial segment and a small portion of the Access
Equipment segment. The Commercial segment is only 8% of EBIT and slower growth
has been factored into my model and is in-line with management’s near-term
expectations. The Access Equipment segment is more levered to commercial
construction spending and also has significant growth opportunities overseas.
Third, the market may be pricing in an economic environment that will slow more than
expected. However, most economic indicators are not signaling a significant slowdown
and certainly not a recession. Also, a significant portion of Oshkosh’s revenue is from
the government, which is not heavily dependent on the economic environment.
Finally, investors may believe that management will have trouble integrating JLG. This
may be the case and is the reason for my below-consensus estimates. However, JLG was
more accretive in FY2007 than was expected. Also, JLG will eventually be fully
integrated and it presents the Company with significant opportunities through exposure to
rapidly-expanding international economies, increased diversification of product lines, and
a reputable and market-leading brand.
19
Appendix A - Oshkosh Truck Balance Sheet
Year Ended September 30 ($ in millions, except
per share data)
FY
2007
FY
2006
Assets
Current Assets
Cash & Short-Term Investments
Net Receivables
Inventory
Other Current Assets
Total Current Assets
75.2
1,076.2
909.5
134.0
2,194.9
22.0
317.9
589.8
73.7
1,003.4
127.5
280.2
490.0
56.6
954.3
30.1
253.9
368.1
58.6
710.7
19.2
159.8
242.2
45.5
466.7
40.0
142.7
210.9
33.4
427.0
Net Property, Plant & Equipment
Long-Term Investments
Intangibles
Other Assets
Total Assets
429.6
35.1
3,597.5
142.7
6,399.8
231.9
19.3
778.0
78.4
2,111.0
193.0
20.3
528.4
22.2
1,718.2
168.6
21.2
531.2
20.7
1,452.4
146.5
22.0
445.9
2.2
1,083.3
140.4
22.3
423.0
11.6
1,024.3
Liabilities and Shareholder's Equity
Current Liabilities
Debt in Current Liabilities
Accounts Payable
Income Taxes Payable
Other Current Liabilities
Total Current Liabilities
90.0
628.1
64.0
765.9
1,548.0
136.0
236.5
12.8
496.8
882.1
42.9
226.8
11.6
494.3
775.6
98.6
200.3
17.6
363.2
679.7
70.4
115.7
0.3
281.6
468.0
42.0
116.4
8.6
226.0
393.0
Long-Term Debt
Deferred Taxes
Minority Interest
Other Liabilities
Total Liabilities
2,975.6
340.1
3.8
138.7
5,006.2
2.2
100.0
3.8
61.0
1,049.1
2.6
55.4
3.1
62.9
899.6
3.2
66.5
2.6
64.3
816.3
1.5
47.6
0.0
47.1
564.2
131.7
39.3
0.0
50.5
614.5
0.7
227.6
1,165.3
1,393.6
6,399.8
0.7
205.2
856.0
1,061.9
2,111.0
0.7
186.1
631.8
818.6
1,718.2
0.4
134.7
501.0
636.1
1,452.4
0.4
126.5
392.2
519.1
1,083.3
0.2
111.6
298.0
409.8
1,024.3
Common Stock
Capital Surplus
Retained Earnings
Total Shareholders Equity
Total Liabilities and Shareholder's Equity
20
FY
2005
FY
2004
FY
2003
FY
2002
Appendix B – Oshkosh Truck Income Statement
Year Ended September 30 ($ in millions,
except per share data)
Net Sales
Cost of Goods Sold
SG&A
Depreciation & Amortization*
Operating Income
Interest Expense
Nonoperating Income
Nonrecurring Pretax Income (Expense)
Pretax Income
Income Taxes
Minority Interest
Net Income
FY
2007
FY
2006
FY
2005
FY
2004
FY
2003
FY
2002
6,307.3
5,270.4
446.6
129.0
590.3
200.8
13.5
0.0
403.0
135.2
(0.3)
268.1
3,427.4
2,827.5
265.6
37.2
334.3
7.4
8.6
(8.4)
335.5
121.2
0.5
205.4
2,959.9
2,472.8
220.4
31.4
266.7
8.2
4.1
0.5
262.6
102.3
0.6
160.2
2,262.3
1,905.9
176.0
26.9
180.4
5.5
4.2
(0.3)
179.1
65.9
0.1
112.8
1,926.0
1,640.5
156.3
24.8
129.2
13.5
2.1
(5.1)
117.8
37.1
0.0
75.6
1,743.6
1,489.1
143.3
25.4
111.2
21.3
2.0
0.0
91.9
32.3
0.0
59.6
3.64
3.58
2.82
2.77
2.25
2.18
1.62
1.57
1.18
1.15
0.88
0.86
Basic EPS
Diluted EPS
* D&A included in Cost of Goods Sold
21
Appendix C – Oshkosh Truck Cash Flow Statement
Year Ended September 30 ($ in
millions, except per share data)
FY
2007
FY
2006
FY
2005
FY
2004
FY
2003
FY
2002
Operating
Net Income
Depreciation and Amortization
Deferred Tax Credit
Other Operating Activities
Loss (Gain) - PP&E
Dec (Inc) in Accounts Rec
Dec (Inc) in Inventory
Inc (Dec) in Accounts Payable
Inc (Dec) in Income Tax Credit
Net Change in Other A&L
Net Cash Flow - Operating
268.4
129.0
13.6
(4.4)
(1.4)
(408.9)
116.0
137.8
34.7
121.9
406.7
205.5
37.5
(19.6)
12.1
0.1
(8.8)
(48.9)
11.4
1.6
(11.8)
179.1
160.2
34.7
4.0
(2.4)
0.3
(20.7)
(110.9)
28.0
19.2
99.9
212.3
112.8
28.0
0.0
(3.3)
0.3
(56.3)
(94.4)
67.5
19.5
60.9
135.0
75.6
26.1
2.0
3.5
(1.6)
(10.8)
(25.7)
(1.6)
(1.1)
38.9
105.3
59.6
25.4
(1.9)
(3.9)
0.0
70.6
48.9
17.3
(12.4)
60.3
263.9
Investing
Cap Ex.
Acquisitions and Investments
Sale of Property & Investments
Other Investing Activities
Net Cash Flow - Investing
(102.0)
(3,140.5)
14.6
0.6
(3,227.3)
(56.0)
(272.8)
(43.2)
(31.3)
(30.0)
(87.5)
(24.7)
0.0
(15.6)
0.0
(0.1)
(328.9)
6.0
(68.5)
(11.0)
(128.5)
(3.5)
(28.2)
(7.8)
(23.4)
(29.6)
(79.9)
3,003.2
4.9
6.0
(34.9)
2,869.7
(27.1)
64.4
(0.6)
2.4
4.1
0.0
43.2
(16.0)
(51.6)
(0.7)
23.6
0.0
0.0
(44.7)
(9.1)
10.1
(1.0)
4.6
0.0
(1.3)
3.3
(6.4)
51.4
(152.9)
9.6
0.0
0.0
(98.3)
(5.8)
0.0
(209.3)
2.3
0.0
0.0
(212.8)
Exchange Rate Effect
4.1
1.2
(1.7)
1.1
0.5
1.1
Increase (Dec) in Cash
53.2
(105.4)
97.4
10.9
(20.7)
28.8
Financing
Dividends
Change in Current Debt
Change in Long Term Debt
Change in Capital Stock
Tax Benefit of Stock Options
Other Financing Activity
Net Cash Flow - Financing
22
Appendix D – Oshkosh Truck Projected Income Statement
Year Ended September
30 ($ in millions, except
per share data)
Net Sales
Cost of Sales
SG&A
Operating Profit
Interest Expense
Pre Tax Income
Tax
Non-Operating Income
Net Income
FY
2009E
7272.1
FY
2008E
7002.5
FY
2007
6307.3
5204.5
446.6
590.3
(200.8)
389.5
(135.2)
6.3
268.1
FY
2006
3427.4
2827.5
265.6
326.2
(7.4)
318.8
(121.2)
8.6
206.2
FY
2005
2960.0
2472.8
220.4
267.1
(8.2)
258.9
(102.3)
4.1
160.7
FY
2004
2262.3
1905.9
176.0
180.5
(5.5)
175.0
(65.9)
4.2
113.3
FY
2003
1926.1
1640.5
156.3
129.2
(13.5)
115.7
(37.1)
2.1
80.7
FY
2002
1743.6
1489.1
143.3
111.1
(21.3)
89.8
(32.3)
2.0
59.5
654.4
(152.7)
501.7
(150.5)
7.3
358.5
605.6
(147.1)
458.6
(137.6)
7.0
328.0
EPS
Basic
Diluted
Consensus Revenue
Consensus EPS – Diluted
4.86
4.79
7890.0
5.36
4.45
4.39
7415.0
4.72
3.64
3.58
2.82
2.77
2.25
2.18
1.62
1.57
1.18
1.15
0.88
0.86
Avg number of shares
(000's)
Basic
Diluted
73,700
74,800
73,700
74,800
73,700
74,800
73,200
74,400
71,300
73,600
70,000
72,000
68,200
70,000
67,300
69,100
Depreciation and
amortization, total
% of sales
138.2
1.9%
140.1
2.0%
129.0
1.9%
37.5
1.1%
34.7
1.2%
28.0
1.2%
26.1
1.4%
25.4
1.5%
Cap Ex
% of sales
116.4
1.6%
112.0
1.6%
126.1
2.0%
56.0
1.6%
43.2
1.5%
30.0
1.3%
24.7
1.3%
15.6
0.9%
Inventories
% of sales
Accts Receivable
% of sales
Accts Payable
% of sales
Chg in WC
1185.3
16.3%
799.9
11.0%
523.6
7.2%
(26.2)
1155.4
16.5%
770.3
11.0%
490.2
7.0%
(77.9)
909.5
14.4%
1076.2
17.1%
628.1
10.0%
(686.4)
589.8
17.2%
317.9
9.3%
236.5
6.9%
(127.8)
490.0
16.6%
280.2
9.5%
226.8
7.7%
(121.7)
368.1
16.3%
253.9
11.2%
200.3
8.9%
(135.5)
242.1
12.6%
159.8
8.3%
115.7
6.0%
(49.0)
210.9
12.1%
142.7
8.2%
116.4
6.7%
(237.2)
Sales growth
SG&A
Interest Expense
Operating Profit
Non-Operating Income
Tax Rate
3.8%
-7.5%
-2.1%
9.0%
0.1%
-30.0%
11.0%
-7.5%
-2.1%
8.6%
0.1%
-30.0%
84.0%
-7.1%
-3.9%
9.4%
0.1%
-22.9%
15.8%
-7.7%
-0.3%
9.5%
0.3%
-37.2%
30.8%
-7.4%
-0.3%
9.0%
0.1%
-38.3%
17.5%
-7.8%
-0.3%
8.0%
0.2%
-36.5%
10.5%
-8.1%
-0.8%
6.7%
0.1%
-28.7%
-8.2%
-1.4%
6.4%
0.1%
-29.1%
23
Appendix E – Discounted Cash Flow Model
24