OSK - Oshkosh Stock: Looking Good Into 2024

2024-01-12 17:16:06 ET

Summary

• Oshkosh Corporation has seen operating momentum and strong quarterly earnings, with shares surpassing the $100 mark and fundamentals looking sound into 2024.
• Recent revenue growth and margin expansion have been impressive, and moreover are spread across segments, backed up by a strong backlog.
• Last year, Oshkosh announced an $800 million deal to acquire John Bean Technologies' Aerotech business, although the diversification attempt raises some questions as well.

In May of last year, I noted that Oshkosh Corporation ( OSK ) was struggling and performing at the same time. After a tough 2022, Oshkosh saw some operating momentum, as an M&A deal brought some diversification, which in itself raised some questions as well. Despite the questions on this deal, I liked the valuation, even as the long-term operating performance was somewhat sluggish.

The company quickly delivered on its potential, as strong quarterly earnings send shares to the $100 mark over the summer, with fundamentals looking sound into 2024.

Heavy Equipment

Oshkosh is a producer of heavy equipment, including machinery used by fire and emergency crews, defense applications, construction, and even environmental applications.

The company generated $7.7 billion in sales in 2021, with revenues growing by double digits amidst easier comparables. Operating profits of $545 million worked down to earnings of $6.83 per share, although that adjusted earnings were seen at $5.75 per share. The company guided for relatively stable revenues in 2022, but being a lumpy business, the company reported some quarterly results during the year.

After a recovery later in the year, the company grew full year sales by 4% to $8.3 billion, with full year adjusted earnings down to $3.46 per share. Promising was that >20% growth was seen in the final quarter, with Oshkosh posting an adjusted earnings number of $1.60 per share in the final quarter, as the company restored a net cash position.

The company guided for 2023 sales to come in around $8.4 billion, with adjusted earnings seen around $5.50 per share. Following a bolt-on deal and strong first quarter, the company upped the full year guidance, now seeing full year sales around $8.65 billion and earnings around $6 per share. Trading at 12-13 times earnings, while operating with a flattish net cash position, valuations were non-demanding by all means.

This thesis changed a bit as Oshkosh announced an $800 million deal to acquire John Bean Technologies´( JBT ) Aerotech business. The unit provides ground support systems, gate equipment and other airport services, set to add $80 million in EBITDA and $100 million if we factor in synergies, all of that on a $575 million sales number.

With Oshkosh being valued at around $5 billion, the $800 million deal was substantial, as the deal valuation looks fair, but comes with questions on the strategic side of the deal. That observation, in combination with the fact that Oshkosh has demonstrated on a lackluster growth performance over time, as well as the loss of a massive JLTV defense contract to competitor AM General, made investors a bit cautious.

While a re-rating over time was likely possible over time and the valuation looked compelling, I recognized that it could take some time as well to play out.

Recovery Is Complete

A stock trading in the $70s in May already rose to the $100 mark as soon as August of last year. Ever since, shares have largely traded in a $90-$110 trading range, now trading hands at $106 per share.

The peak towards the $100 mark in August coincided with the release of the second quarter results, which were very strong. Revenues rose by 17% to $2.41 billion, with the backlog increasing by two billion dollars to $15 billion over the past twelve months.

On top of the strong growth, it notably was impressive gross margin expansion, which drove a big increase in operating profits. These earnings tripled to $235 million, for margins just shy of 10%, as net earnings of $175 million came in at $2.67 per share. It was the strong earnings number which triggered the company into hiking the full year adjusted earnings number for the year, now seen around a midpoint of $8 per share.

Momentum continued during the fall, as Oshkosh reported third quarter results in October. Revenues were up 21% to $2.51 billion, as the backlog rose further to nearly $16 billion, for a very strong book-to-bill ratio. Operating profits of $256 million just surpassed margins of 10%, with net earnings of $184 million coming in at $2.79 per share. Part of this growth was driven by the Aero Tech deal, which contributed about two months during the quarter, contributing about $115 million in sales during that period of time. Adjusted for some items (including costs related to that deal), adjusted earnings came in at $3.04 per share for the quarter.

Net debt jumped to a billion, due to the acquisition, but also due to accelerating growth, resulting in larger receivables and inventory positions, among others. With full year earnings seen around $9.50 per share, this suggests that adjusted earnings for the final quarter are seen at $2 and change.

Leverage is no major concern as EBITDA trends around a billion as well, for leverage ratios around 1 times, as normalization in working capital patterns should quickly bring down leverage here.

Moreover, continued momentum appears seen in the demand for its products, with Oshkosh announcing a $208 and $160 million deal for its JLTV Oshkosh Defense Joint Light Tactical Vehicles.

What Now?

The truth is that Oshkosh has really seen some operating momentum as of recent, and rightfully has seen rewarded with a 50% increase in the share price ever since. This is well deserved, driven by strong growth, margin expansion, a growing backlog and interesting deals, certainly as net debt will likely quickly come down.

Moreover, the defense business of Oshkosh sees some momentum again as Oshkosh sees growth in other markets as well, notably next-generation delivery vehicles, although the performance of Oshkosh has historical been a bit lumpy and has seen some volatility. For now, the backlog remains strong, due to the political unrest and related to that defense spending, but attributing all the strength to this tailwind would not do right to the performance of Oshkosh.

Amidst all this, it is time to perform a balancing act. With earnings power seen at $9.50 per share, but now trading over $10 per share, the valuations looks anything but stretched after the run higher. Then again, current 10% operating margins exceed the long term average of 6-7% by quite a margin, suggesting that earnings could easily fall to $6-$7 again if margins normalize and subside.

That said, even in such a case, valuations remain not too demanding, but I recognize the run-up seen in the share price as well. Amidst all this, now is the time to gradually sell out of a position on substantial further moves higher, although Oshkosh Corporation shares definitely remain on my watch list to add below the $100 mark again.

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