The big news this week has really been all about the announcement from President Trump that the U.S. and Mexico have agreed to enter a new trade deal that will effectively replace the longstanding NAFTA agreement between the two countries and Canada. The specifics of the deal still remain to be seen, since in many respects they haven’t been finalized; but so far it appears to focus heavily on the auto industry, expanding the criteria for how much of an automobile must be produced in North America to qualify for tariff protection, increasing the requirement for sourcing aluminum and steel from local producers, and specifying a minimum wage of $16 per hour for workers.
Of course, Mexico is just one of several countries the Trump administration has been targeting for changes in trade policy and agreements; but the market seems to hope that they are just the first domino to fall and ease tensions between the U.S. and its largest trade partners, including Canada, the European Union and, perhaps most significantly, China. Steel and aluminum tariffs, which were the first to be imposed this year, now appear to be in position to also be the first to ease – a development that bodes well for the prospects not only of the auto industry but also of related industries, including heavy machinery.
One of the challenges lately for investors interested in some of the largest players in the Heavy Machinery segment is that most of the most well-known companies, like Caterpillar (CAT) and Deere & Company (DE), are already pretty expensive, running at prices well above $100 per share. Oshkosh Corporation (OSK) is a somewhat smaller player in the industry, being categorized as a mid-cap stock versus the large-cap status of its larger brethren, and it has the added bonus of being available at a lower stock price; but don’t let its smaller size fool you. This is a company that recently celebrated 100 years in business, and offers a range of vehicles that cover construction, waste management, field service and access, military and emergency response and service vehicles. Like most Heavy Machinery stocks, OSK has dropped for most of the year and is currently down about 29% since hitting an all-time high at about $100; but with a strong fundamental profile and a promising value proposition, this looks like a stock that could present a good long-term opportunity.
Fundamental and Value Profile
Oshkosh Corporation (OSK) is a designer, manufacturer and marketer of a range of specialty vehicles and vehicle bodies, including access equipment, defense trucks and trailers, fire and emergency vehicles, concrete mixers and refuse collection vehicles. The Company’s segments include Access Equipment; Defense; Fire & Emergency, and Commercial. The Access Equipment segment consists of the operations of JLG Industries, Inc. (JLG) and JerrDan Corporation (JerrDan). The Defense segment consists of the operations of Oshkosh Defense, LLC (Oshkosh Defense). The Fire & Emergency segment consists of the operations of Pierce Manufacturing Inc. (Pierce), Oshkosh Airport Products, LLC (Airport Products) and Kewaunee Fabrications LLC (Kewaunee). The Commercial segment includes the operations of Concrete Equipment Company, Inc. (CON-E-CO), London Machinery Inc. (London), Iowa Mold Tooling Co., Inc. (IMT) and Oshkosh Commercial Products, LLC (Oshkosh Commercial). OSK has a current market cap of about $5.2 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings grew by about 19.5%, while revenue increased almost 7%. Growing earnings faster than sales is difficult to do, and is generally not sustainable in the long-term; but it is also a positive mark of management’s ability to maximize its business operations effectively. The company operates with a narrow operating margin; over the last twelve months, Net Income was about 5.5% of Revenues. This number increased in the last quarter to a little above 7%.
- Free Cash Flow: OSK’s free cash flow is healthy, at more than $253 million. This number has increased steadily since early 2017, from below zero.
- Dividend: OSK’s annual divided is $.96 per share, which translates to a very impressive yield of 1.34% at the stock’s current price.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for T is $33.11 and translates to a Price/Book ratio of 2.15 at the stock’s current price. The stock’s historical average Price/Book ratio is 2.14, meaning that the stock is practically at par with its Book Value. That doesn’t sound like there is much room to grow; but another measurement that I like to use to complement my analysis is the stock’s Price/Cash Flow ratio; in the case of OSK, the stock is trading more than 82% below its historical Price/Cash Flow ratio. While a target price at nearly $130 is probably not realistic – the stock only hit $100 for the first time in January of this year – it does imply that there is good reason to suggest the stock’s January highs are well within reach.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s upward trend until the beginning of this year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. It’s easy to see the downward trend the stock has followed for most of this year; however it is also interesting to note that since late June, the stock has shown some resilience, with support in the $69 range and short-term resistance at around $75 per share. The stock would need to push above this range to begin forming a new upward trend, while a drop below $69 could see the stock drop to as low as the $56 level as shown by the 88.6% Fibonacci retracement line.
- Near-term Keys: The stock would need to break above $75 to give a good bullish signal that you could act on, either for a short-term, momentum-based trade with call options, or to buy the stock outright with a plan to hold for a longer period of time. A drop below $69 could be an opportunity to work the bearish side by shorting the stock or by buying put options.