Earlier in 2016, I wrote a bullish article on Oshkosh Corporation (OSK, Financial) and the stock has not disappointed, with returns of 37% for YTD16. In this article, I renew my bullish view on the stock with discussion on the key stock upside triggers in the medium to long-term. Based on the discussion to follow, my conclusion is that the best part of revenue, EBITDA and cash flow growth is still to come for Oshkosh Corporation.
I want to start this discussion with the company’s third quarter 2016 results and Oshkosh Corporation reported revenue of $1.7 billion for the third quarter as compared to revenue of $1.6 billion for FY15. Further, EPS for the comparable periods was the same at $1.13. The reason for starting my discussion with these numbers is to state that flat revenue or EPS in the near-term is not a concern as the company’s order backlog in key segments will ensure that revenue and EPS growth starts coming in the next few quarters.
The second point from the third quarter results is that Oshkosh Corporation now expects full year 2016 EPS at $2.6 to $2.8 per share. Oshkosh Corporation is therefore trading at 19.8 times FY16 earnings if the mid-range EPS of $2.7 per share is considered. Further, analyst estimates suggest that earnings growth for FY17 is likely to be 27% and this would imply FY17 EPS of $3.4. Oshkosh Corporation is therefore trading at FY17 price-earnings of 15.6 and I believe that these are attractive valuations for a company with robust order backlog.
In terms of the order backlog, Oshkosh Corporation currently has a defense order backlog of $2.3 billion and the defense segment will trigger major earnings upside in FY17. Even beyond FY17, the company’s backlog is likely to remain strong.
It is encouraging to note that the company’s fire and emergency order backlog has increased by 12% on a year-on-year basis to $853 million and is likely to be the second biggest revenue and cash flow contributor after the defense segment.
In the access equipment segment, the company’s backlog was down by 5% (3Q16 vs. 3Q15), but this was largely expected with mining slowdown in Australia, along with depression in other commodity based economies like Brazil. When considering a 3-5 year investment horizon, I expect decent turnaround in the access equipment segment as well.
From a backlog perspective, it is also important to mention that in the last 6-12 months, Oshkosh Corporation has won some prestigious contracts from the government sector. With increasing geo-political tensions globally, I expect more orders from the defense sector in the next 3-5 years and this will serve as a major stock upside trigger.
Coming to the fundamental health, Oshkosh Corporation had debt of $944 million as of the third quarter of 2016 and it translates into debt to capitalization of 33%, giving the company robust financial flexibility to service a big order book. Further, it is worth noting that Oshkosh Corporation reported operating cash flow of $162 million for the first nine months of 2016, as compared to negative operating cash flow of $37 million for the comparable period in FY15.
With improving cash flows, I expect dividends to increase in the coming years and as dividends increase on an annual basis, the stock is likely to be re-rated. Overall, the fundamentals are strong along with improvement in cash flows and this factor provides additional support to the stock on the upside.
In conclusion, Oshkosh Corporation is a solid long-term investment with a robust order backlog and strong EPS growth likely in the next 12-18 months. Even beyond this period, the company’s EPS growth is likely to be above 10%, according to analyst estimates. This makes Oshkosh Corporation attractive and worth considering even after robust upside in YTD16.
Disclosure: No position in the stock.
