Oshkosh Corporation (OSK, Financial) is a leading designer, manufacturer and marketer of a broad range of access equipment, commercial, fire and emergency, military and specialty vehicles and vehicle bodies. With the company announcing yesterday that it has won a $6.7 billion order for light tactical vehicles from U.S. Army, this article discusses the positive of holding the stock for the long term.
Coming to the contract first, U.S. Army Tank-Automotive and Armaments Command has awarded Oshkosh Defense, LLC, an Oshkosh Corporation company, a $6.7 billion firm fixed price production contract to manufacture the Joint Light Tactical Vehicle (JLTV). Under this contract, Oshkosh expects to deliver approximately 17,000 vehicles and sustainment services. Therefore, the first big positive is that the contract immediately adds significantly to the company’s firm order backlog and changes the revenue and cash flow visibility for the next few years.
The second important point to note in the contract is that it is extendable to approximately 50,000 vehicles from the current contract of 17,000 vehicles. According to reports, the contract therefore has a backlog potential of $30 billion that is likely to be executed in the next few years. In other words, the contract is certainly game changing for Oshkosh Corporation and I see sustained stock upside as the firm price order is executed over the next few years.
Further, according to reports on the contract, Oshkosh Corporation beat a team made up of Lockheed Martin (LMT, Financial) and BAE Systems (BAESF, Financial)(BAESY, Financial), as well as bidder AM General LLC, which built Humvees. I wanted to mention this because it underscores the point that Oshkosh Corporation has a strong product offering that garners an edge over big competitors. With geopolitical tensions increasing globally, I expect Oshkosh Corporation to benefit further over the long term.
Besides this particular contract, I would like to mention here that the company derived 79% of YTD15 revenue from the U.S., 5% from other countries in North America, 8% from EMEA and 8% from other countries globally. The point I want to make here is that just 16% of the company’s revenue is from outside North America. With the company looking to go global, I see big opportunities in the coming years. In particular, the current contract with the U.S. Army underscores the company’s capabilities, and I expect to see more global defense contracts.
A significant advantage that Oshkosh Corporation will have as a result of the big contract is that the company’s backlog will cater to the sector that is insulated from slowdown or recession. Therefore, I expect the company’s EPS and cash flow growth to be robust at least for the next five years. Importantly, the coming years will see increased shareholder reward through higher dividends and share repurchase as cash flows from firm price contracts. Therefore, Oshkosh Corporation is certainly worth holding after the big contract and considering the company’s intent to expand globally.
From a valuation perspective, Oshkosh Corporation is trading at FY16 (September 2016) PE of 12.0, and these are certainly attractive valuations. The company’s five-year expected PEG ratio is currently at 0.82, suggesting undervaluation. With the current backlog and the prospects of orders globally, Oshkosh Corporation deserves higher valuations and I believe that the stock will continue to trend higher from these levels over the next few years.
In conclusion, Oshkosh Corporation is at the beginning of new growth phase and investors can consider the stock at these levels for robust dividends and capital appreciation.
