Just how good are those numbers?
Let’s start with the 34% return on tangible invested capital. Is it as good as some of the companies we’ve covered in Gurufocus’ own Micro-Cap Magic Formula newsletter? No… but it’s better than 80-85% of the S&P 500. It’s better than dominant tech companies like Cisco (CSCO) and Dell (DELL).
And it’s not like Oshkosh is having one year of great earnings / returns on capital, but it is in a business doomed to earning terrible returns in the long run. While this year’s figures are a bit above their normal levels, Oshkosh has consistently earned outstanding returns on capital. Check out this chart showing their 10-year return numbers.
Again, to put their average returns on tangible capital in perspective, it resembles an asset-light tech company like Dell more than it does an asset-heavy vehicle maker with union labor.
So how cheap is the 4.1 times EV / EBIT number? Very cheap, to say the least. That valuation puts Oshkosh within the top 15 cheapest stocks in the S&P 500.
No, not the top 15 percent. The 15 cheapest stocks in the entire S&P 500.
Here’s another nifty trick to show just how cheap Oshkosh is. They’re currently trading for just under $3 billion market cap and around $3.7 billion enterprise value. In December 2006, Oshkosh acquired JLG for $3.1 billion in cash. JLG currently makes up about 30% of Oshkosh’s revenue and around 7.5% of their operating profit. So you’re buying the entire company for the same price Oshkosh bought 30% of themselves for.
Did Oshkosh overpay for JLG? Probably… But that doesn’t change the fact the Oshkosh is probably trading for a significant discount to its parts.
So here you’ve got a business with a proven history of outstanding returns trading for rock bottom prices.
Oshkosh derives the majority of its revenue from large government defense spending, and most of the rest of it from municipalities. Oshkosh is coming off several huge and lucrative defense orders. Add to that the fact the federal government is pulling troops home from overseas and slashing all spending ,and states and municipalities are facing severe budget short falls. It doesn’t take a genius to figure out that Oshkosh’s revenue in the near future is likely to be lower than it has been in the past few months.
But that doesn’t mean Oshkosh is a bad investment. Far from it. In fact, Oshkosh might be a tremendous investment. Mr. Market is terrified by the storm clouds hovering around Oshkosh’s business. But Oshkosh has been around for over 100 years and enjoys some tremendous brands. While the near term is cloudy, they should be able to use their brands to take share from rivals as budgets shrink and weather any storm that comes their way. And today’s investor is likely buying into those shares at a huge discount in anything but the most pessimistic of scenarios.
And there’s a huge catalyst on the horizon to unlock that discount.
Billionaire activist Carl Icahn recently disclosed an almost 10% stake in the company. We’ve seen this movie several times before with Icahn – he buys up a big share of a company, talks to management, and eventually the company is put in play. Sometimes it’s friendly, sometimes it’s through a proxy fight, but the company is almost always put into play.
Management seems receptive so far. They immediately put out a press release saying they are “open to dialogue with… shareholders.”
To sum it all up, you’ve got a company with a proven history of strong returns on capital trading for a huge discount in an unloved industry with one of the best activists / “corporate raiders” in the world claiming the company is undervalued…. And management basically agreeing!!!
Seems like a good deal to me. Investors pursuing a magic formula / value strategy should definitely give Oshkosh a look.