- A 15% decline in quarterly sales to $1.68 billion
- 30 basis points worth of improvement in operating profit margins (7.1%)
- "Only" a 14% drop in earnings to just $0.83 per share
The good news is that both earnings and revenues appear to be in line with analyst estimates. The bad news is that those estimates were not particularly optimistic. Three of Oshkosh's four business segments experienced sales declines in the quarter, with commercial truck revenues down 2%, fire and emergency vehicle sales off 10%, and the defense business off a staggering 42% as the wind-down of operations in Afghanistan took a huge bite out of Oshkosh's business building All-Terrain MRAP armored vehicles (M-ATV).
Result: Even cutting costs and improving efficiency wasn't enough to keep Oshkosh's profits growing in Q2. Worse, management noted that were it not for a series of one-time items -- some of which boosted earnings, while others drained them -- the quarter's profits would have been $0.03 lighter at just $0.80 per share. Needless to say, investors are not pleased.
But was the news bad enough to justify today's 5% sell-off in the stock?
Actually, possibly, yes it does. Adding today's numbers to Oshkosh's past three quarterly earnings reports, we find the stock has trailing GAAP profits of $2.86 per share. At today's share price, this works out to a valuation of more than 18 times earnings on the shares.
Combined with Oshkosh's modest 1.1% dividend yield, that's probably not too high a price to pay (albeit certainly no bargain) for the 14%-plus, long-term-earnings growth that analysts were expecting Oshkosh to achieve over the next five years, before today's news came out. With earnings heading "the wrong way," however, those growth estimates have to be thrown into some doubt.
The big hope for investors at this point, of course, is that Oshkosh will pull out of its Q2 funk, produce stronger profits in H2, and deliver on CEO Charles Szews's reiterated promise to earn between $3.40 and $3.65 per share by the end of this year. Based on these numbers, Oshkosh is still selling for about 15 times the current year's expected earnings. What's more, delivering the promised earnings would give investors increased confidence in Oshkosh's ability to keep growing at the expected growth rate over the years to come -- justifying the 15 times multiple to earnings.
Will it happen? Given that so far this year Oshkosh has been putting up negative numbers for free cash flow despite reporting positive GAAP profits (cash burn to-date has totaled $90.7 million), I have to say that I'm less than optimistic that the GAAP numbers are about to turn sharply upwards. I think investors are right to be cautious, and right to be selling the stock today.
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