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For shareholders in military trucker Oshkosh (NYSE: OSK ) , it's shaping up to be a fine summer indeed. Fresh from its victory over Force Protction (Nasdaq: FRPT ) and General Dynamics (NYSE: GD ) , Navistar (NYSE: NAV ) and BAE in the competition to build an "MRAP-Lite" for the Afghan theater, Oshkosh notched its second victory in as many months yesterday.
It's a smaller victory this time. Still, investors gave Oshkosh a "standing O" on the news that it will build the Army's new Family of Medium Tactical Vehicles (FMTV). And yet, on the face of it, the news doesn't seem all that grand. At just $281 million, it's certainly not as large as the multibillion-dollar M-ATV contract that Oshkosh won last month, or the also-multibillion-dollar JLTV contract that Oshkosh lost last year ...
... at least, not until you notice that yesterday's award concerned only Oshkosh's first installment under the new contract. And that these 2,568 trucks and trailers amount to just 11.1% of the total 23,000 units anticipated for purchase under this indefinite delivery, indefinite quantity (IDIQ) contract.
IDIQ, therefore I am
Its name notwithstanding, though, I think we can at least take a crack at figuring out how much this "indefinite" contract is worth to Oshkosh. A is to B as C is to D, so so if 2,568 units nets Oshkosh $281 mil, that works out to just a skosh under $110,000 per truck. Multiply this average price by 23,000, and FMTV's total value to Oshkosh could equal $2.5 billion over five years.
So does Oshkosh have room to run?
It depends. Post-FMTV-news, Oshkosh gained about $428 million in market cap. Now, back in the go-go years under the hawkish President Bush, Jr., defense contractors were routinely awarded a market cap of about equal to their annual sales. If FMTV is worth $2.5 billion over five years, we can posit it will increase Oshkosh's annual sales by about $500 million -- which suggests that the increase in price did not capture the full value of the new contract.
But there's just one caveat: Bush is no longer in office, and investors no longer love defense cotnractors. Marquee names like Lockheed Martin (NYSE: LMT ) , Boeing (NYSE: BA ) , and Northrop Grumman (NYSE: NOC ) are fetching P/S ratios ranging from 0.66 all the way down to just 0.45.
In this environment, I'm wondering if debt-laden Oshkosh actually deserves a 1.0 ratio. Seems to me, its current 0.52 may be more appropriate ... in which case, Oshkosh investors could find themselves looking over a cliff, exclaiming, "Gosh, that first step's a doozy."