Oshkosh Corporation
RECOMMENDED ACTION
Investment Thesis
Oshkosh Corporation is a leading
manufacturer of industrial trucking equipment,
generating over $6 billion in revenues from four
operating segments. The company’s adoption of
lean manufacturing principles, as well as its focus
on new product development is what gives
Oshkosh its sustainable competitive advantage.
As a result, Oshkosh maintains a significant
operating margin advantage over its competition,
and I believe that this company is extremely
undervalued at this time. I feel that the current
macroeconomic environment will yield moderate
growth for the Industrials sector as a whole, with
Oshkosh performing better than the overall sector.
With the substantial amount of downward pressure
the stock has recently experienced, I believe there
is very little downside risk in owning this stock.
260
2007
2006
2005
2003
Recommendation:
BUY
Updated:
8/12/08
Analyst:
Michael Leesburg
Fisher College of Business
Contact:
Email:
(740) 464-1077
leesburg.3@osu.edu
Sector (S&P):
Industry (S&P):
2006
Industrials
Trucking
Market Cap:
1.3B
Shares Outstanding: 73.9M
Avg Daily Volume: 1.4M
YTD Return:
52 Week High:
52 Week Low:
Beta:
161
110
2007
$44.71
STOCK INFORMATION
2,262 1,926
2004
Target Price:
Net Incom e (m illions)
204
3,427 2,960
$16.59
Fund:
OSU SIM
Managers: Royce West, CFA
Chris Henneforth, CFA
I have assigned Oshkosh a one-year price
target of $44.71. The following are key
assumptions in supporting this:
•
The US economy will resume normal
growth rates in 1Q 2009
•
The Industrials Sector will perform in-line
relative to the S&P 500 over the next year
•
The dollar will slowly weaken through FY
2009, but oil will settle out around
$120/barrel
•
Discounted Cash Flow, Comparative
Multiples, and Sum of Parts Analysis
support this target price, suggesting that
Oshkosh’s intrinsic value is ~120% higher
than its current trading price
Revenue (m illions)
Current Price:
ANALYST INFORMATION
Summary
6,307
NYSE: OSK
2005
2004
80
2003
-64.1%
$63.55
$15.19
2.78
EPS - Diluted (dollars/share)
3.48
2.75
2.18
1.55
1.14
2007
2006
2005
2004
2003
Table of Contents
Company Overview……………………………………………………………………...2
Access Equipment……………………………………………………………….3
Defense…………………………………………………………………………..3
Fire and Emergency……………………………………………………………...4
Commercial………………………………………………………………………4
Sector Analysis…………………………………………………………………………...5
Comparative Multiples Evaluation……………………………………………….5
Macroeconomic Factors…………………………………………………………..6
Outlook…………………………………………………………………………...7
Industry Analysis…………………………………………………………………………7
Five Forces Analysis……………………………………………………………...7
Barriers to Entry…………………………………………………………..7
Substitutes…………………………………………………………………7
Buyer Power………………………………………………………………8
Supplier Power……………………………………………………………8
Rivalry…………………………………………………………………….9
Company Analysis………………………………………………………………………...9
Strategy……………………………………………………………………………9
Competitors………………………………………………………………………11
Competitive Advantage………………………………………………………….11
Equity Valuation: Comparitive Multiples………………………………………..12
Absolute Valuation………………………………………………………12
Company vs. Sector Valuation…………………………………………..13
Equity Valuation: Sum of Parts Analysis……………………………………….13
Equity Valuation: Discounted Cash Flow Model……………………………….14
Summary and Recommendations………………………………………………………..14
Key Drivers………………………………………………………………………15
Sensitivity analysis……………………………………………………………….15
Exhibit 1:
Exhibit 2:
Exhibit 3:
Exhibit 4:
Oshkosh Products…………………………………………………………….17
Oshkosh Acquisitions………………………………………………………..18
Sum of Parts Analysis………………………………………………………..19
Discounted Cash Flow……………………………………………………….20
1
Company Overview 1
Founded in 1917, Oshkosh Corporation has engaged the engineering, design, and
marketing of commercial trucks and other industrial vehicles. The Company is
headquartered in Oshkosh, Wisconsin, and in 2006 changed its name from Oshkosh
Truck Corporation to de-scope its product lines and better define the Corporation.
Oshkosh has completed 15 acquisitions since 1996, and now has four operating segments
from which the company generates over $6 billion in annual revenue. Figure 1 shows the
breakdown of Oshkosh’s revenues by operating segment for FY 2007:
Figure 1: Oshkosh Revenue by Segment
Commercial
20%
Access
Equipment
40%
Fire and
Emergency
18%
Defense
22%
Oshkosh maintains a global presence, with operations in the United States, Mexico, and
Europe to serve customers all over the world. Table 1 describes the breakdown of
revenues by geographic location:
2
Table 1: Sales by Geographic Region (in millions) for FY 2007
United States
Other North America
Europe, Africa, Middle East
Rest of World
Total
4745.5
212.8
1083.7
265.3
6307.3
A sample of products that are offered by Oshkosh Corporation can be seen in Exhibit 1.
Access Equipment
The largest and youngest of the four segments, Access Equipment offers a wide variety
of manlifts, aerial work platforms, scissor lifts, and other general maintenance equipment
to account for 40% of the company’s sales. This segment was added with the purchase of
JLG Industries in 2006, which almost doubled Oshkosh’s revenues. The Access
Equipment segment boasts strong operating margins (>10%), but growth is expected to
reverse in 2009.
Defense
The fastest growing segment within Oshkosh is the Defense segment. Tactical trucks,
comprised of hauling tanks, missile systems, ammunition, fuel, and cargo for combat
units are provided to the Department of Defense. 22% of the Company’s revenues come
from this segment, and this share is expected to increase over the next few years. This
segment looks to be the most promising of the four over the next few years, with
forecasted growth rates of ~15% YOY. Operating margins are also very strong in this
segment, with consistent 13+% performance.
3
Commercial
Refuse collection vehicles for the waste services industry, front and rear discharge
concrete mixers, and portable and stationary concrete batch plants for the ready-mix
concrete industry are the primary products offered by the Commercial segment. This
segment also provides lease financing to concrete mixer customers, concrete batch plant
customers, and commercial waste haulers. Combined, this offering of products and
services provides 20% of the Company’s revenues. Sales and margins are expected to
retract significantly over the upcoming years, and this segment also took a non-cash
write-down of goodwill impairment of $175 million in 3Q 2008.
Fire and Emergency
Fire and Emergency, the smallest and most diverse of the four segments, provides custom
and commercial fire equipment and emergency vehicles to its customers. The product
line includes pumpers, aerial and ladder trucks, tankers, rescue vehicles, rough terrain
response vehicles, mobile command and control centers, and bomb squad and HAZMAT
control vehicles. Towing and recovery equipment, airport snow removal vehicles,
custom ambulances, mobile medical vehicles, and custom vehicles for the broadcast and
communications industry round out the products and services offered by this operating
segment. F&E expects a slight contraction in sales in the near future, and margins in this
segment are in the neighborhood of 8%.
4
Sector Analysis2
Oshkosh Corporation is a member of the Industrials Sector, as defined by Standard and
Poor’s (S&P). This sector currently looks to be fairly valued from a multiples
comparison standpoint. There are several macroeconomic factors that must be
considered as well. The performance of this sector is heavily dependent on oil prices, the
domestic and global economy, the Department of Defense budget, and commodity prices.
Comparative Multiples Evaluation
The Industrials Sector shows a mixed level of attractiveness when looking at historical
ratios and compared with the S&P 500. A ten year time horizon was used for the
Comparative Multiples analysis. The sector appears to be somewhat expensive when
looking from a Price/Sales and Price/Book standpoint. However, from a Price/forward
Earnings, Price/EBITA, and Price/Cash Flow perspective, the sector looks to be trading
at a slight discount. Overall, the sector appears to be fairly valued and boasts a Return on
Equity that is currently 20% higher than the SP500 (a 10yr high). Table 2 shows the
Comparative Multiples breakdown:
Table 2: Industrial sector multiples relative to SP500
Relative to SP500
P/Forward E
P/S
P/B
P/EBITDA
P/CF
Average
High
Low
Mean
Current
1.16
1.13
1.25
1.40
1.18
0.78
0.68
0.78
0.98
0.77
1.00
0.96
1.05
1.18
1.05
0.98
1.03
1.15
1.16
1.02
5
Comparison
to Mean
-2.00%
7.29%
9.52%
-1.69%
-2.86%
2.05%
Valuation
In-line
Expensive
Expensive
In-line
In-line
In-line
Macroeconomic Factors
Performance in the Industrials Sector is heavily dependent on a number of
macroeconomic factors. Oil prices can have a very large effect on profitability in this
sector. Heavy equipment manufacturing requires the transport of very large quantities of
raw materials (steel, coal for electricity, etc.) to the operating facilities, and fuel
surcharges are a way that the raw material suppliers can pass the increasing shipping
costs on to the customers. Typically, the manufacturers can also pass these increasing
costs on the end users of the products they sell; however, since the manufacturers will
book sales several months in advance, there is always a time lag before the manufacturers
are able to see the benefits of such price increases.
The health of the domestic economy also plays a large part in the profitability of the
sector. As budgets are cut, expenditures on heavy equipment that are not absolutely
necessary will likely be pushed out to subsequent years. Low predicted growth in the
overall economy in the next year also puts downward pressure on the value of companies
in the sector. While I do believe that the economy will experience slowing growth
through early 2009, I feel that the domestic economy will recover substantially quicker
than consensus.
The strength of the dollar also affects companies in the Industrials sector. The dollar’s
current weak standing makes goods manufactured in the United States look significantly
cheaper than those manufactured in countries with stronger currencies. This effect is
much more prevalent with companies that have a greater percentage of sales outside the
United States.
6
Outlook
I expect the value of the dollar to fall further through Q1 2009. While this will put
upward pressure on the price of oil, I believe that demand destruction and slowing
consumption growth will mitigate this pressure, and oil will hold fairly constant around
$120/barrel. The end result for the Industrials sector is lower than forecast manufacturing
costs and higher than forecast sales outside the United States.
Industry Analysis
Five Forces Analysis
Barriers to Entry
The Industrial Trucking industry offers significant barriers to entry, which is a negative
for a company looking to get into the industry, but a positive for well-established
companies such as Oshkosh. Capital costs are very high to build operating facilities, and
development of infrastructure to serve a variety of customers would be very time and
resource intensive.
Substitutes
The fact that there are essentially no substitutes for the products offered by the Trucking
industry will prove to be advantageous. While planes and tanks may be considered
substitutes for the Defense segment, the military will continue to require mobile vehicles
to haul equipment and personnel. Stationary manlifts could be substituted for mobile
manlifts in a few select industrial applications; however this type of equipment does not
offer the flexibility that mobile units offer. As for commercial, fire, and emergency
vehicles, the state-of-the-art products offered by the industrial trucking industry will
7
always be a necessity for fire departments, emergency response, and waste collection
services.
Buyer Power
Buyer power is relatively strong in the industrial trucking industry. Switching costs are
relatively low, meaning that when the time comes for a customer to purchase a new
vehicle, he/she can easily switch based on quality, price, or technology advancements.
The industry appears to maintain a relatively firm pricing strategy (evidenced by margin
sustainability), not undercutting the competition to gain market share. This strategy has
deterred price wars, which could be devastating to the industry.
Supplier Power
Supplier power is somewhat weak in this industry. Many of raw materials that are used
in the manufacture of industrial trucks are commodity-type materials. Much of the steel,
plastics, and small parts can be easily substituted for lower cost options. Multiple
sourcing is used in many cases to leverage purchasing power. While there are several
components that are not commodity-type (ie. new technologies and control systems), due
to the customization aspect of the industry, the manufacturers are capable of passing the
cost of these higher priced components on to the customer.
Rivalry
Rivalry is quite low in the industrial trucking industry. While there are several
competitors in the industry, there is not an aggressive pursuance to gain market share
with pricing. Margins have been strong and relatively stable over the past several years,
and the big players in the industry are growing through acquisitions.
8
Outlook
The industrial trucking industry as a whole looks to be attractive for well-established
companies in the industry. Strong barriers to entry make it difficult for new companies to
set up the infrastructure to compete domestically and globally. There are very few
adequate substitute products in this industry, and weak supplier power gives large
corporations in the industry purchasing advantages. While buyer power is somewhat
strong, the companies in the industry are able to differentiate their products and services
to increase their products’ value to the customers. Finally, rivalry is relatively low within
the industry and companies are able to maintain profit margins.
Company Analysis3
Oshkosh Corporation is a leading manufacturer and marketer of specialty vehicles from
four business groups: Access Equipment, Defense, Fire & Emergency, and Commercial.
The company maintains several major brands that are considered leaders in the market.
These brands include Oshkosh, Pierce, JLG, McNeilus, Medtec, Geesink, Norba, JerrDan, CON-E-CO, London, IMT, and Frontline. Oshkosh maintains a corporate strategy
of acquisition, product innovation, and operational efficiency through lean
manufacturing. The company is currently undervalued in the market, and all indications
show the intrinsic value of the company to be more than double its current valuation.
Strategy
Over the past twelve years, Oshkosh has adopted a diversified business model and
focused growth strategies to achieve a CAGR for revenues of approximately 23%. The
strategies that Oshkosh has adopted consist of the following key drivers:
9
•
•
•
Commercialize through acquisition
Lead in product innovation
Embrace lean manufacturing
Oshkosh has proven that it is capable of completing acquisitions, successfully integrating
the company into the business, and driving growth and cost reductions. Exhibit 2
describes the acquisitions that Oshkosh has completed since 1996. Oshkosh maintains
rigid acquisition requirements when evaluating prospective buyout opportunities. These
criteria are as follows:
•
•
•
•
Manufacturers of capital equipment that hold the #1 or #2 position in
growing markets
Companies that can enhance the current corporate culture and deliver
synergies in purchasing, manufacturing, distribution, and product
development
Companies that are capable of being accretive within the first year of
ownership
Looking to extend existing product lines to offer a broader selection of
products to customers.
Product innovation is taken very seriously by Oshkosh Corporation. The company looks
to introduce more new products and technologies than its competitors. Oshkosh is a
frontrunner in robotic vehicle development, diesel-electric drive technology, and
independent suspension systems.
The third piece of Oshkosh’s core strategy is to continuously improve operational
efficiencies by embracing lean manufacturing. The company launched a lean initiative in
FY 2004 in order to enhance its overall cost structure and improve returns on invested
capital.
10
Competitors
There are only a handful of competitors in the industrial trucking industry. In the
commercial segment, Terex is the primary competitor, along with PACCAR and
Navistar. Federal Signal competes with the Fire and Emergency segment. Northrup
Grumman is a major player in the Defense segment for Oshkosh, and Ingersoll-Rand
competes with the company’s Access Equipment segment. While each of these
companies competes with Oshkosh in one or two segments, none is as well diversified
within the industry as Oshkosh.
Competitive Advantage
Oshkosh relies on its core strategies to give the company a competitive advantage.
Focusing on new products allows the company to be on the leading edge of technology
development, and its well-established customer base gives the company quick-entry
ability with new technologies. The adoption of lean manufacturing principles allows the
company to maximize its cost control and maintain high margins during periods of
economic downturns, and its vision of strategic acquisitions allow Oshkosh to leverage
synergies to provide continuously increasing stakeholder value. From an operating
margin standpoint, Oshkosh also maintains a substantial advantage over its competition,
as can be seen in Table 3:
11
Table 3: 2007 Operating Margins
Company
Oshkosh
Ingersoll-Rand
Terex
Federal Signal
Navistar
Northrop Grumman
PACCAR
Operating Margin
9.4%
8.4%
6.7%
5.1%
-1.0%
NA
NA
Equity Valuation: Comparative Multiples
Absolute Valuation
When looking at the multiples (P/E, PS, etc.) and how they compare to historical values,
Oshkosh’s stock price looks very attractive. For this analysis, it is assumed that the
multiples will revert to the mean. These target prices based on the four multiples were
then averaged to develop an Absolute Valuation Target Price of $47.27. The contribution
of the absolute valuation to the overall target price will be 30%. While reversion to the
mean is a solid assumption, timing is not factored into this analysis, thus making it less
accurate than DCF valuation. Table 4 describes the absolute valuation of Oshkosh, along
with the target price based on mean reversion:
Table 4: Valuation based on Comparative Multiples
Absolute Valuation
High
Low
Mean
Current
Target
Multiple
P/Forward E
P/S
P/B
P/EBITDA
Average
24.00
1.46
5.20
13.90
5.00
0.19
0.80
1.60
13.50
0.60
2.60
7.20
5.00
0.19
0.80
1.60
13.50
0.60
2.60
7.20
12
Target
E,S,B,
etc per
share
3.23
92.80
21.00
4.89
Target
Price
$43.61
$55.68
$54.60
$35.21
$47.27
Company vs. Sector Valuation
When comparing Oshkosh to other companies in the sector, Oshkosh’s current stock
price appears very inexpensive. All of the multiples are at their 10 year lows compared
with the Industrials Sector as a whole. Table 5 shows how the multiples of Oshkosh
compare to the Industrials Sector:
Table 5: Oshkosh stock vs. Industrials Sector
Stock vs. Sector
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
Average
High
Low
Mean
Current
1.41
0.87
1.57
1.60
1.53
0.29
0.13
0.30
0.24
0.31
0.72
0.41
0.78
0.80
0.99
0.40
0.15
0.30
0.24
0.31
Comparison
to Mean
-44.44%
-63.41%
-61.54%
-70.00%
-68.69%
-61.62%
Valuation
Cheap
Cheap
Cheap
Cheap
Cheap
Cheap
Equity Valuation: Sum of Parts Analysis
Sum of Parts analysis is used to generate a target price based on the P/S ratios of other
companies within similar industries. Competitors used for this analysis include Terex,
Navistar, and PACCAR for the commercial segment, Federal Signal for the F&E
segment, Northrop Grumman for the defense segment, and Ingersoll-Rand for the access
equipment segment. Using this method, a target price of $61.48 has been generated for
Oshkosh. This analysis will only account for 20% of the contribution to the overall target
price, due to the fact that there are few companies that only focus on one of the four
segments that Oshkosh operates in, and the diversity within the companies causes this
method to be less accurate than the other valuation methods. Also, this particular sum of
parts analysis only looks at sales. The Sum of Parts analysis can be viewed in Exhibit 3.
13
Equity Valuation: Discounted Cash Flow
The Discounted Cash Flow model (DCF) is used to generate a target price for Oshkosh
based on expected future earnings. Several key assumptions were made in the model and
are outlined as follows:
•
•
•
•
•
•
The overall domestic economy will remain weak through 1Q 2009, but
will return to normal levels of growth
The global economy will continue with normal growth rates through 2009.
Discount rate of 12.0% - this is set higher than typical discount rates due
to higher inherent risk associated with the company
Sales in the Access Equipment segment will drop in 2009, but not to the
extent of the consensus estimates
Growth in Defense segment will continue through 2009 (in-line with
consensus)
F&E and Commercial segments will see slight retraction in sales through
2009
Using these assumptions, I get a target price for Oshkosh of $36.47. This presents a
120% upside for the stock. The DCF component will make up the largest portion of the
overall target stock price (50%).
Summary and Recommendations
I believe that Oshkosh Corporation is tremendously undervalued in the market. From a
macroeconomic standpoint, several of the key economic issues appear to favor the sector
and the company. Oil prices have relaxed in the past month, and due to demand
destruction and slowing consumption growth, will continue to push downward in the
future. While a weakening dollar will put upward pressure on oil, it will not be enough to
overcome the slowing rate of demand growth. Oshkosh is well positioned within the
industry to take advantage of growing worldwide demand, as well as growing domestic
demand in mid-2009 that will be supported by the weakening dollar. Based on these
14
economic conditions, as well as the target price of $44.71 visible in Table 6, I am placing
a BUY rating on Oshkosh Corporation.
Table 6: Final Target Price for Oshkosh Corporation
Target Price Category
Discounted Cash Flow
Comparative Multiples
Sum of Parts
Final Target Price
Target Price
$36.47
$47.27
$61.48
% Contribution
50%
30%
20%
Contribution
$18.24
$14.18
$12.30
$44.71
Key Drivers
The key drivers for the stock include the macroeconomic factors previously discussed, as
well as the company’s ability to generate sales growth outside of the US and maintain
operating margins. Oshkosh maintains the highest margins in the industry, thus they
have more flexibility in making strategic decisions. If sales are present, operating
margins will come naturally. However, if sales stagnate, the company may have to take
measures such as market related downtime at some operating facilities in order to keep
margins elevated. In any event, I feel that Oshkosh will generate the necessary sales and
will successfully overcome challenges that may arise.
Sensitivity Analysis
An in-depth look at sales growth and operating margins reveals that it would take large
decreases in growth rates and operating margins to lower the intrinsic value of the
company to its current level. Table 7 describes the various target stock prices for
different combinations of revenue growth and operating margins in FY 2008. It is
15
evident that it would take 0% revenue growth and 6% operating margin to achieve the
intrinsic value for which the stock is currently trading. The same assumptions for 2009
and beyond were used for this analysis as were used in the prior DCF model. While there
are many factors that could influence this sensitivity matrix, the table shows that it would
take a substantial negative move in these two key areas to devalue the company to its
current trading price.
Table 7: Effect of Revenue Growth and Margins on DCF Value
Revenue Growth
Margins
10%
9%
8%
7%
6%
4%
$50.96
$43.82
$36.68
$29.54
$22.40
3%
$47.30
$40.64
$33.97
$27.31
$20.64
2%
$43.92
$37.70
$31.47
$25.25
$19.03
1%
$40.79
$34.98
$29.17
$23.37
$17.56
0%
$37.90
$32.48
$27.06
$21.64
$16.22
References
1
from oshkoshcorporation.com
data from StockVal
3
from oshkoshcorporation.com
2
16