A Specialty Vehicle Company Highly Focused on the Bottom Line

Oshkosh (NYSE: OSK  ) faces a strong headwind due to the sequester and reduced Department of Defense spending. But the specialty truck company also sees strength in other areas, and it has a plan in place to cut costs and improve its bottom line over the long haul. 

Recent results and expectations
Oshkosh operates in four different segments: Access equipment, Defense, Fire and Emergency, and Commercial.

Overall, its third quarter showed top-line growth, with net sales increasing 2.1% to $2.2 billion year over year. Diluted earnings per share came in at $1.67, versus just $0.84 in the year-ago quarter. Oshkosh attributes the latter improvement to its Move strategy, which basically comes down to segment optimization and cost-cutting for margin improvement. Its cost of sales fell to $1.8 billion vs. $1.9 billion in the year-ago quarter. By buying back 1.1 million shares, Oshkosh added $0.07 per share to its bottom line.

Oshkosh likes to look at the big picture, as evidenced by its FY 2015 EPS goal of $4.00-$4.50. Defense sales are expected to decline, mostly due to the sequester, but Oshkosh believes that the continued implementation of its Move strategy still makes that big goal attainable.

Now let's look ahead to the not-so-distant future.

Quick segment breakdown

Access equipment is Oshkosh's strongest segment. Sales here jumped 15.6% to $941.5 million in the third quarter, mostly thanks to replacement demand in North America, higher pricing, and improved aftermarket sales.

  • Access equipment FY 2013 sales expectation:  $3.1 billion
  • Previous access equipment FY 2013 sales expectation:  $2.8 billion-$3.0 billion

Defense sales dropped 8.2% to $879.6 million, with Department of Defense sales declining $280 million. Government demand should continue to weaken in the sequester's wake and the winding down of combat in Iraq and Afghanistan. However, Oshkosh has seen higher international sales of mine-resistant ambush-protected all-terrain vehicles -- mostly to the Middle East.

  • Defense FY 2013 sales expectation:  $3.1 billion
  • Previous Defense FY 2013 sales expectation:  $3.1 billion-$3.2 billion

In Fire and Emergency, sales plummeted 11% to $204.3 million. While sequestration will hurt government sales, continued strong municipal demand (in certain areas) is expected to pick up the slack in this division.

  • Fire and Emergency FY 2013 sales expectation:  $800 million
  • Previous Fire and Emergency FY 2013 sales expectation:  $720 million-$750 million

There have been no substantial trends in the commercial segment, and FY 2013 sales expectations remain at $720 million-$750 million.

Overall, the company's expectations are more positive than negative, but that doesn't mean it's a better investment than its peers. Let's take a quick look.

Similar investment options
Oshkosh, with a market cap of $4.0 billion, is slightly larger than Terex (NYSE: TEX  ) , which operates as an equipment manufacturer of specialized machinery products. And then there's Federal Signal (NYSE: FSS  ) , which supplies everything from emergency vehicles to aerial platforms to street cleaning vehicles, and it has a market cap of just about $795 million, making it a much smaller company than its aforementioned peers. 

Oshkosh has been the most impressive of this group for top-line growth over the past five years.

OSK Revenue TTM Chart

Oshkosh revenue trailing-12 months data by YCharts

The same can be said for earnings growth.

OSK EPS Diluted TTM Chart

Oshkosh EPS diluted trailing-12 months data by YCharts

Therefore, it should come as no surprise that Oshkosh has been the best performer over this time frame:

OSK Chart

Oshkosh data by YCharts

Oshkosh also looks fundamentally sound based on the following margins:

 Company

Forward P/E

Net Margin

ROE

Dividend Yield

Debt-to-Equity Ratio

Short Position

Oshkosh

13

4.49%

18.66%

None

0.48

4.00%

Terex

11

0.59%

1.72%

None

0.85

11.40%

Federal Signal

16

12.96%

57.75%

None

0.54

1.30%

Source: Company financial statements.

This information, combined with revenue and EPS trends as well as historical stock performance, makes Oshkosh look like the best investment in its peer group. 

The Foolish bottom line
Oshkosh will continue to cut expenses in non-growth areas, which, in addition to share buybacks, should aid the bottom line. As far as the top line is concerned, Oshkosh should see growth in Access Equipment and Fire and Emergency, but not in Defense and Commercial.

It's therefore possible that Oshkosh's shares could rise -- but the U.S. government spending cuts are a big headwind that should temper any enthusiasm and could lead to a very bumpy road. However, thanks to the company's diversification, fiscal responsibility, and  strong management, Oshkosh should remain a long-term winner.

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