What to Do With Oshkosh Now?

What should you do with a company whose highest revenue-generating segment gets hit hard by government-related issues, and the situation is not expected to get better anytime soon? You dig deeper to learn more.

The U.S. military's largest armored-vehicle supplier, Oshkosh (NYSE: OSK  ) , saw its third-quarter earnings slump by an astounding 68% as defense sales slipped significantly in the quarter, sending the shares down by 13%.

With the government settling on a $900 billion cut in defense and domestic spending over a decade, and everyone anticipating further reductions later this year, we need to figure out what it could mean for Oshkosh and shareholders of the company.

The numbers
Sales in defense, Oshkosh's biggest segment, fell nearly 35% from the year-ago quarter to $1.1 billion. The primary factors were lower volumes of an MRAP armored vehicle and costs associated with the transition between two vehicle variants.

What's important to note here is that the company is moving away from a vehicle that has been a big revenue generator so far. Though Oshkosh is the only supplier of the new FMTV vehicles, it doesn't expect FMTV sales to be profitable before Q2 of fiscal 2012.   

Sales in Oshkosh's access-equipment business, its second biggest segment, rose 44%, helped by strong demand and price increases. These factors had also helped rival Terex's (NYSE: TEX  ) second-quarter segmental sales jump by 108%. But for Oshkosh, taking defense-related sales into account, its segment's sales fell 18.4% from last year.

Low defense sales weighed tremendously heavily on the company and dragged total revenues down by 17% from the year-ago period to $2 billion. It also punished its bottom line by a steep 68% to $68.4 million in the quarter.

The "defensive" war
The U.S. defense budget cuts, including concessions stemming from scheduled and expected troop withdrawals from Afghanistan and Iraq, should affect all companies that have large government-driven orders. And there are quite a lot of them these days, including Oshkosh.  

For instance, the delayed defense-spending bill slowed down General Dynamics' (NYSE: GD  ) defense bookings in its second quarter. Force Protection (Nasdaq: FRPT  ) has now recognized the need to look beyond Afghanistan for its business and is focusing on related strategies. The pain is hitting the military-industrial complex far and wide.

Now, companies will need to vie for a larger share of the smaller defense-budget cake, stiffening competition in the industry. And that's just to break even. Oshkosh, too, is now planning to focus more on its non-defense segments.

One point worth noting here is Oshkosh's debt reduction. The total debt-to-equity ratio has improved significantly year on year, from 126.5% to 68.5%. Interest coverage looks decent at 5.8. This may give Oshkosh further latitude to try new things and push away from a heavy reliance on defense spending. 

In the coming months, though, Oshkosh expects lower sales in most segments. There could be another silent challenge looming here. Oshkosh's production and delivery schedules of military vehicles could be affected by tire supply constraints, which may in turn have an impact on the forthcoming quarter's operating incomes by as much as $25 million. That just adds to the pile of recent bad news for the company.

The Foolish bottom line
Oshkosh's defense segment will remain under pressure for the indefinite long term. The prudent choice for investors may be to wait till the new FMTV vehicles become profitable, while other segments start contributing higher positive margins. Till then, you probably should avoid this stock.

Fool contributor Neha Chamaria owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of Oshkosh and General Dynamics. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (12)

Comments from our Foolish Readers

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  • Report this Comment On August 02, 2011, at 9:43 PM, dannywg wrote:

    This is weird how you forgot to mention their $904 million dollar contract they just signed yesterday. Also they have expanded their fire truck and equipment which was announced today. When you go short give investors the truth and include everything.

  • Report this Comment On August 02, 2011, at 10:59 PM, kenjotto wrote:

    Dannywg,

    Isn't the $904M order for more FMTV vehicles? Which he mentioned we should wait for them to become profitable with? All the revenues in the world don't matter if OSK is wrapping the trucks in $100 bills when they deliver them...

  • Report this Comment On August 03, 2011, at 1:39 AM, dannywg wrote:

    The $904 is the biggest military contract out there right, and is only one sector of their buisiness. That's also an add-on order to another so we could even get more add-ons to that. http://www.huntingtonnews.net/6957 and this is big on our fire equip. expansion. yes the defense sector sucks but they will separate the strong defense from the week and osk will be on the strong side. Also we have oskkosh defense and their growing the oskkosh corporation buisiness big.About Oshkosh Defense

    Oshkosh Defense, a division of Oshkosh Corporation, is an industry-leading global designer and manufacturer of tactical military trucks and armored wheeled vehicles, delivering a full product line of conventional and hybrid vehicles, advanced armor options, proprietary suspensions and vehicles with payloads that can exceed 70 tons. Oshkosh Defense provides a global service and supply network including full life-cycle support and remanufacturing, and its vehicles are recognized the world over for superior performance, reliability and protection. For more information, visit www.oshkoshdefense.com.

    About Oshkosh Corporation

    Oshkosh Corporation is a leading designer, manufacturer and marketer of a broad range of specialty access equipment, commercial, fire & emergency and military vehicles and vehicle bodies. Oshkosh Corporation manufactures, distributes and services products under the brands of Oshkosh®, JLG®, Pierce®, McNeilus®, Medtec®, Jerr-Dan®, Oshkosh Specialty Vehicles, Frontline™, SMIT™, CON-E-CO®, London® and IMT®. Oshkosh products are valued worldwide in businesses where high quality, superior performance, rugged reliability and long-term value are paramount. For more information, visit www.oshkoshcorporation.com.

  • Report this Comment On August 03, 2011, at 9:35 AM, havvey wrote:

    With a bad economy i doubt municipal gov will be buyig new fire trucks etc, at a rate fast enough to make this a rocket stock.

  • Report this Comment On August 03, 2011, at 10:49 AM, kenjotto wrote:

    Dannywg,

    You still didn't answer my question. Isn't the FMTV program an unprofitable product? I thought I remembered that being discussed in the conf call transcript. I could be mistaken.

  • Report this Comment On August 04, 2011, at 5:51 AM, dannywg wrote:

    I wouldn't say that $904 million dollar FMTV contract is unprofittable, Dude thay m,aking a fortune off it,and the just got another $20 some milliondollar deal today. THeir during very fine.

  • Report this Comment On August 04, 2011, at 8:24 AM, kenjotto wrote:

    I didn't say their FMTV contract is unprofitable, OSK's CEO said it. From the transcript:

    "While we are delivering FMTVs to our customers desired schedule and quality, we're still incurring costs that are impacting our ability to earn a profit on this program."

    "We still don't expect FMTV sales to be profitable during fiscal 2011. And we now expect that the FMTV program will begin to be profitable in the second quarter of fiscal 2012, not during the first quarter, as we have previously discussed, as it will take longer to insource much of this work."

    So, they don't make a fortune off of it. They don't make any money off of the program. Revenues are great, but they don't always translate to earnings and cash flow. Without earnings and cash flow, a company is worthless.

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