Heavy equipment maker Oshkosh Corporation (OSK 0.74%), seldom mentioned in today's world of e-commerce and digital services, recently made rare headlines after winning the new USPS delivery vehicle fleet contract. Media attention gave the manufacturer of firefighting equipment, cement mixers, garbage trucks, and armored vehicles a welcome stock market boost.
With multiple major orders rolling in this year, Oshkosh has a bullish glow right now -- but potential investors should think about a few possible warning signs, too.
The good
Some things are certainly looking good for Oshkosh, either as a continuation of long-term strengths or because of positive new developments. The major pluses the company has right now include:
1. Vigorous earnings growth
One of the most significant highlights in Oshkosh's June 2021 investor presentation, and in its second quarter (Q2) fiscal 2021 earnings report, is an 18.4% jump year over year in adjusted earnings per share (EPS) to $1.44 per share. The company is guiding for full-year EPS of $6.35 to $6.85, a 34.5% to 45.1% rise from fiscal 2020's adjusted $4.72 EPS. While still lower than fiscal 2019's $8.21 EPS, earnings are moving strongly in a positive direction.
During the recent Q2 earnings conference call, CEO John Pfeifer noted, "supply chain disruptions will likely remain a risk," but he highlighted earnings and revenue growth, plus an increase in operating margin to a point above 11%, as strongly upbeat indicators. He said Oshkosh "previously expected a return to growth in the second half of the year, so we are pleased to be ahead of schedule," and that North American orders are up 80% compared to fiscal 2020, "leading to a solid backlog." Oshkosh has beaten consensus earnings estimates by Wall Street analysts during four of the last four reported quarters, according to Yahoo! Finance data.
Image source: Getty Images.
2. The USPS contract
Winning the Next Generation Delivery Vehicle, or NGDV, contract from the Postal Service gives Oshkosh yet another effectively open-ended government contract, which will see deliveries continue for at least a decade. The arrangement is similar to its military Joint Light Tactical Vehicle (JLTV) contract, another $6 billion deal which has seen the Wisconsin manufacturer deliver its 10,000th armored truck this February, with at least 8,126 JLTVs still on order. The NGDV contract calls for 50,000 to 165,000 USPS vehicles to be delivered over a decade, but is "indefinite delivery, indefinite quantity." The company is gearing up to start production in 2023 in Spartanburg, South Carolina.
3. A contract for infantry fighting vehicle upgrades
Besides the $6 billion USPS contract and $6 billion JLTV contract, Oshkosh won an approximately $943 million contract to install turrets equipped with 30mm cannons on the U.S. Army's Stryker Infantry Fighting Vehicles (IFVs). While the press release provides no timetable, Oshkosh's turret system has already passed military testing and the company appears set to receive nearly $1 billion in revenue from the project.
4. Momentum in innovation
Companies rarely thrive by standing still. With several initiatives this year, Oshkosh appears to be at least trying to stay abreast of current developments and enter new markets. In addition to its partially electric USPS delivery vehicles, it is expanding its electric vehicle (EV) offerings with an electric hybrid fire truck and an electric hybrid airport rescue vehicle under the Volterra nameplate.
The company claims its EV fire truck is the first in North America, potentially giving it a first-mover advantage if municipal or higher governments continue pushing ahead with electrification for their heavy equipment, too. Oshkosh also acquired Pratt Miller in January 2021, giving it access to robotics and software technology related to both motorsports and defense applications. This acquisition likely opens the door to developing new military and civilian products enhanced with automated systems. According to Yahoo! Finance, Oshkosh is rated as an "Outperform" in innovation by the TREA Innovation Index, which ranks it at a 71 (out of 99) compared to its industry average of roughly 41.
The bad
While Oshkosh has some advantages and significant orders, there are a couple potential problems lurking:
1. Slow revenue growth
Oshkosh's top line is also growing, but much slower than its earnings. Its net sales rose 5.1% year over year in Q2 2021 to $1.89 billion, held back by lower defense sector sales. This is down 5% compared to its pre-pandemic fiscal Q2 2019 revenue of $1.99 billion. This raises the possibility that its current rate of earnings growth could be unsustainable and based mostly on internal efficiency improvements. However, it is also still clearly rebounding from COVID-19 and its two major new orders are not yet adding to revenue.
2. Litigation over the USPS contract
One of the other contenders for the USPS delivery vehicle contract, EV maker Workhorse Group (WKHS 1.58%), has launched a federal lawsuit against the award to Oshkosh. Workhorse, which has seen significant stock price decline following a brief brush with "meme stock" status, calls the USPS' decision to go with Oshkosh's entries -- a hybrid electric and internal combustion engine (ICE) model, and a low-emission ICE vehicle -- "arbitrary, capricious, and without rational basis," especially in light of the fact that Workhorse's entry was all electric. Workhorse also claims that in disqualifying its vehicle, the Postal Service "falsely blamed Workhorse's prototype vehicle for a "safety incident" that was clearly the result of the USPS driver's error." Though the chance appears remote, with Workhorse manufacturing a tiny handful of vehicles annually compared to Oshkosh's proven delivery record being one potential factor in resolving the lawsuit in Oshkosh's favor, this litigation could still complicate or reduce Oshkosh's portion of the USPS contract.
The takeaway
While heavy equipment companies aren't at the top of many investors' picks in the current year, Oshkosh Corporation appears to be a solid company with several major advantages. Its hybrid electric ICE vehicles may be bridging the gap into an EV future for commercial and perhaps eventually even military vehicle sales. It has won several new, potentially very profitable government contracts and appears to have the production capacity and cash to deliver these orders successfully.
While Workhorse's litigation has a small chance of reducing or eliminating the USPS order, and the company's relatively slow revenue growth could be a bearish signal, Oshkosh's innovation, large orders, and good cash flow all make it look like a bullish pick overall for Fools investing in industrial stocks or defense stocks.
