Heavy equipment and vehicle-maker Oshkosh (NYSE: OSK) reported a more than doubling in quarterly net income Tuesday, confirming strength in its sales to the residential construction market, as well as an ability to charge higher prices for military vehicles.
Operating profit margins increased across the board, and the company raised its earnings guidance for the year ahead. So naturally, Oshkosh shares dropped.
I know. That hardly seems to make sense, does it? Oshkosh simply crushed analyst earnings estimates for the quarter, delivering $0.97 per share in profit where only $0.86 were forecast. It added a dime to its full-year forecast as well, predicting that earnings could rise as high as $3.15 by year-end. First-half operating profit margins, at 5.8%, still fall far short of rival armored-vehicle makers Textron (NYSE: TXT) and General Dynamics (NYSE: GD). But Oshkosh is now neck-and-neck with heavy-equipment maker Terex (NYSE: TEX), and is simply smoking unprofitable rival MRAP maker Navistar (NYSE: NAV).
Yet after all this, the stock went down, when the rest of the market went up? Crazy.
Or not so crazy
Yet there is some method to Mr. Market's madness today. For example, while Oshkosh beat on earnings, it missed on revenues, as sales fell more than forecast. Oshkosh also seems to be having to work harder than in years past to turn revenue into free cash flow. Operating cash flow for the first six months of fiscal 2013 actually declined in comparison to fiscal H1 2012.
Even with Oshkosh making prudent cutbacks in capital spending, therefore, the company still only generated about $29 million in real free cash flow for the first half of the year. While up modestly from last year's performance, that's not even a patch on the $133 million in net income the company claimed to have earned in H1.
What's worse is that things appear to be getting worse. Free cash flow for the past year -- $203 million -- represented 70% of net income at Oshkosh. FCF for the most recent six months, in contrast, backed up a mere 22% of reported income. If Oshkosh keeps rolling in this direction much longer, the stock could wind up being worth even less than the 15 times earnings its shares currently command.
Up 75% in price over the past year, it looks like Oshkosh's big run is done.