2023-05-31 15:29:55 ET
Summary
- Oshkosh Corporation saw a tough 2022 but has recently found some operating momentum again.
- This is to be applauded, as Oshkosh announced a deal which brings diversification, which looks fair from a valuation multiple point of view, but raises some questions as well.
- I like the Oshkosh Corporation valuation here, despite some continued operational long-term lackluster operating performance.
Back in November, I concluded that power struggles were seen in the case of Oshkosh Corporation ( OSK ) . The company saw margin struggles on the back of supply chain issues, although the worst might be over as the company announced a small bolt-on deal in Italy. Given the situation, I saw fair value at best at the time, and the dynamics ever since have been rather interesting.
A Recap
Oshkosh Corporation is a producer of heavy equipment, which includes machinery used by fire and emergency crews, defense applications, in construction and maintenance activities, and environmental solutions, among others.
The company generated $7.7 billion in sales in 2021, a solid 13% increase from 2020 (amidst easier comparables). Operating earnings rose 11% to $545 million, as net earnings came in at $473 million, equal to $6.83 per share based on a share count of 69 million shares. Adjusted for some one-time benefits, earnings came in at $5.75 per share.
A $90 stock trading pre-pandemic, peaked in the $130s in 2021 amidst this momentum. This was based on the operational performance of the business and a very strong balance sheet , revealing over half a billion in net cash, equal to more than $8 per share.
With shares trading at $120 at the start of 2022, the company traded at a realistic 18-20 times earnings multiple, which looked reasonable. That being said, the company has posted stable revenues within a $6-$8 billion range for years now, amidst flattish margins, although that the company has been able to reduce the outstanding share base by a quarter over the past decade while maintaining balance sheet strength.
Besides the not-so-impressive long-term operational growth, Oshkosh Corporation saw a tough 2022. First quarter sales fell 3%, as second quarter sales were down as much as 6%. Moreover, the company cut the original earnings guidance of $5.50 per share for 2022 to $3.50 per share alongside the release of the second quarter earnings results. On top of the lower earnings power, the company has taken on a net debt load of $121 million by the third quarter, due to poor working capital conversion.
This made that shares were down to $92 in November, even as they had risen from a low of $70 already. Amidst the operational challenges, the company announced an EUR186 million deal to acquire Italian-based Hinowa, a bolt-on deal given a prevailing $6.2 billion enterprise valuation at the time. Amidst the mediocre long-term performance, and a soft operating 2022 performance, I was in no rush to step in and join the ride.
Struggling
A $90 stock in November traded briefly in the triple digits in February, but ever since shares have fallen back to $75 at this point in time.
In January, Oshkosh posted strong fourth quarter results, with revenues up 23% to $2.20 billion, as full year sales rose 4% to $8.3 billion. The company posted relatively strong fourth quarter adjusted earnings of $1.60 per share, although that full year earnings were down to $3.46 per share following a soft performance in the first three quarters of the year. The company has furthermore restored a net cash position, equal to about $200 million.
While the company guided for flattish sales in 2023 at around $8.4 billion, the company anticipated adjusted earnings of $5.50 per share, in line with the 2021 performance. So while the earnings outlook was decent, the anticipated sales growth was lackluster.
In April, Oshkosh reported a 17% increase in first quarter sales to $2.27 billion as adjusted earnings came in at $1.59 per share, a solid performance. Moreover, momentum is set to continue as the backlog of $14.8 billion is up more than two billion compared to this time last year. Following the strong quarter, the company hiked the sales guidance to about $8.65 billion, seeing earnings around $6 per share, as the company now operates with a minimal net debt load again, due to the Hinowa deal closing.
With 65.8 million shares now trading at $75 the market value and enterprise value has compressed to $5 billion here. Based on the forward earnings power this year, the earnings multiple has fallen to just 12-13 times earnings, which is a low multiple given the momentum here.
A Big Deal
Towards the end of May, Oshkosh Corporation announced a substantial deal as it has reached a deal with John Bean Technologies Corporation ( JBT ) to acquire its AeroTech business. The transaction is valued at $800 million, or $720 million after factoring in expected tax benefits. Reported EBITDA at a run rate of $80 million, is set to increase to $100 million if we factor in twenty million in anticipated synergies (to be realised in the coming three years) with the effective EBITDA multiple comes in at just 7 times and change.
The AeroTech unit provides aviation ground support systems, gate equipment and related airport services. Typical products to think of include deicers, cargo loaders, tugs and towers, boarding bridges, ground power and baggage systems, among others. With the own business on track to generate about half a billion in EBITDA this year, and the deal adding about a hundred million in EBITDA, I peg the pro forma net leverage ratio around 1.3-1.4 times.
With a $575 million revenue contribution, it is clear that these activities are on average far more profitable than Oshkosh, the reason why a premium sales multiple seems warranted, although the EBITDA multiple seems very reasonable. The associated deal presentation shows that the D&A component is quite heavy at $44 million of the $80 million in anticipated standalone EBITDA. That said, it has not been quantified how large depreciation and large amortization charges were, individually.
And Now?
With an expected EBIT contribution of $36 million, and perhaps $50-60 million if I make some estimates for amortization charges (which is an estimate), we can construct the pro forma P&L. Assuming a 5% cost of financing on an $800 million deal, the pre-tax earnings contribution is seen at just $10-$20 million, perhaps adding $0.10-$0.20 per share after-taxes, yet pre synergies. Leverage will increase quite a bit, as an $800 million deal is substantial given a $5 billion enterprise valuation.
Amidst two very strong recent quarters and a continued setback in Oshkosh Corporation shares, I am attracted to the business, as the deal with John Bean looks fair. However, in reality, Oshkosh really has something to prove in terms of long-term sustainable sales growth, which has been lacking. The question can be asked if it makes sense for Oshkosh Corporation to move into another line of the business with the acquisition.
Moreover, the company has seen a commercial setback as well. While posting strong current performance and backlog, the company has lost out on a massive JLTV defense contract to AM General, making investors probably rightfully nervous, probably the result of long-term operational issues.
With shares down so much, I must say that the appeal of Oshkosh Corporation is increasing a lot, despite the loss of the defense contract and a deal which is somewhat puzzling. At these levels, a re-rating might be probable over time. While I do not regard Oshkosh Corporation as being great quality, I think that the current pullback in the share price looks compelling, amidst a resilient performance in recent quarters.
For further details see:
Oshkosh Corporation: Struggling And Performing At The Same Time