If there are any four year old boy stock-pickers, you can bet they own Oshkosh (OSK 0.72%): how could they resist? Firetrucks, garbage trucks, cement mixers, tow trucks, cranes and the Joint Light Tactical Vehicle -- what's not to like? For one thing, its share price performance: Oshkosh has lagged thirty-five percentage points behind the Standard & Poor's 500 Index since the beginning of 2014.
Why has Oshkosh underperformed?
Oshkosh can't offer the usual excuses -- "China did it," "Currency did it." Chinese sales aren't significant, Chinese product doesn't compete in its home markets, and 78.5% of fiscal 2015 (year to September 30) revenue came from the U.S. Weak demand for access equipment (cranes and aerial work platforms) was the main culprit in 2015, but the company has had difficulties across all its operations. Access Equipment is Oshkosh's largest activity (42.2% of fiscal Q1 revenue). http://investor.oshkoshcorporation.com/investors/news-releases/news-releases-details/2016/Oshkosh-Corporation-Reports-2016-First-Quarter-Results/default.aspx
The main buyers of access equipment are rental companies. U.S. rental demand was strong in 2015, despite reduced oilfield activity. But rental companies became cautious last summer, and new orders evaporated. Some of this resulted from earlier heavy investment to meet tighter emission standards. Yet rental demand should remain firm through 2016 -- December's highway bill may provide some stimulus. By now rental companies should have repositioned their fleets, and are better able to estimate their future needs: there's a slight chance that orders could pick up later this year.
Recovery in Oshkosh's other businesses
After deterioration across the rest of Oshkosh's business lines in 2015, resulting from factors peculiar to each of them, they're beginning to recover. While the access equipment order backlog declined 7.7% YOY in Q1 (ended December 31), all other product lines except commercial (garbage trucks, cement mixers) reported gains, and the firmwide total rose 30.5%. All Oshkosh's activities other than access are managing to increase revenue and margins, but from depressed levels.
With orders up 81.4%, the military business is the star: revenue and earnings picked up sharply in fiscal Q1 after a weak year after a pause in U.S. procurement and delayed foreign orders depressed fiscal 2015 business. Preliminary work on the Joint Light Tactical Vehicle, potentially a source of $30 billion revenue, has resumed despite Lockheed Martin's (LMT -0.09%) attempts to dispute the contract. Fire and emergency also gained strongly, recovering from production difficulties last year. The commercial division's situation is mixed: cement mixers face problems similar to those of access equipment, while garbage trucks are in better shape.
Yet all these businesses need plenty of work: the Q1 improvements were from a low base. Margins are weak and Oshkosh's problems with its fire and safety manufacturing process are disturbing. The flow of work is so uneven that production planning must be very difficult, and given that a great deal of the value added in Oshkosh's products is purchased from third parties, this makes it very difficult for the company to obtain any purchasing economies.
But not enough to offset weakness in access equipment
Assuming that orders for cranes, cherry-pickers, and cement mixers don't pick up, or pick up too late to make a difference in fiscal 2016, Oshkosh's other businesses can't take up the slack: it recently cut its fiscal 2016 forecast to $2.20 to $2.60 versus 2015's $2.90. Yet the Yahoo! Finance consensus for fiscal 2017 earnings per share is $3.07, suggesting that analysts expect a recovery somewhere in its business.
As production on the Joint Light Tactical Vehicle ramps up and delayed orders for legacy vehicles continue to come in, military earnings will certainly improve, but it's unlikely that military or any other division's revenue or margins can reach levels comparable to those that access equipment can manage when times are better. So the analysts' forecast of a fiscal 2017 earnings rebound unavoidably requires a recovery in access equipment. Assuming that commercial construction activity will remain strong in 2017 may prove to be a tall order: infrastructure spending may take up some slack, but is unlikely to be able to offset any slowdown in the commercial sector. Oshkosh is probably best left to the four-year olds for the time being.
