As the market has rebounded from the end of December until now, the Industrial sector has rebounded from declines around 25% to reclaim about half of the distance lost as measured by the S&P 500 Industrial Sector SPDR (XLI) since the beginning of the year. At the beginning of the week, you might have thought that this was a sector to stay away from after 600-lb. gorilla Caterpillar Inc. (CAT) cited lower demand in China as cause for missing forecasts in their latest earnings report. You might want to stay away from CAT for the time being; but I think there are better opportunities to be had by focusing on stocks that aren’t as broadly exposed to global risk.
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. The stock has followed the industry and sector higher since the beginning of the year, rebounding from below $60 at the end of 2018 to about $74 as of this writing; but with a solid fundamental profile, along with an interesting value case, the stock looks like it still offers 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 nearly 29%, while revenue increased a little under 5%. 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 5.95% of Revenues. This number increased in the last quarter to a little above 7.35%.
- Free Cash Flow: OSK’s free cash flow is healthy, at more than $347 million. This number has increased steadily since the middle of last year, from $253 million.
- Dividend: OSK’s annual divided is $1.08 per share, which translates to a very impressive yield of 1.45% at the stock’s current price. That also marks an increase from $.96 per share, per annum a couple of quarters ago.
- 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 OSK is $34.73 and translates to a Price/Book ratio of 2.13 at the stock’s current price. The stock’s historical average Price/Book ratio is 2.33, meaning that the stock is only about 9% below that average. 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 about 43% below its historical Price/Cash Flow ratio. That suggests the long-term target price for the stock is a little above $100 per share, which is very nice indeed.
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 downward trend from $100 a year ago until the beginning of November when it bottomed around $51; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock has rallied nearly 50% from that low point, and in the last couple of weeks its short-term upward trend has pushed the stock above the 38.2% retracement line, and very near the 50% line. .5 isn’t actually a Fibonacci number, but it is considered a reasonable indication of emotional resistance or support along a stock’s trend, so if the stock can break above that line at about $76 it should see good near-term momentum to around $82 per share. The 38.2% retracement is also now acting as support for the stock if it weakens from its current price level.
- Near-term Keys: The stock would need to break above $76 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 $70 could be an opportunity to work the bearish side by shorting the stock or by buying put options.