Across the country and around the globe, defense contractors are reeling from the effects of the Sequester -- and government budget cuts in general. One company that's feeling very little pain, though, is Oshkosh (NYSE:OSK). Over the past year, shares of this military-truck maker are up an astounding 88%, a bigger percentage-points gain than the increases at rival armored vehicle makers Textron, General Dynamics, BAE Systems (NASDAQOTH:BAESY) -- combined.
Well, back to back blowout earnings reports at Oshkosh -- punctuated by an astounding 96% increase in Q2 earnings earlier this month -- certainly haven't hurt. But that still prompts the question of what lies behind Oshkosh's relentless surge in profitability. We got one big answer to that question last week, when the Pentagon announced it has just awarded a $77 million add-on to Oshkosh's contract to build so-called "family of medium tactical vehicles" trucks for the U.S. Army.
As Yogi Berra famously observed, "It's hard to make predictions, especially about the future." Yet even with that caveat, the Army seems to have seriously bungled its estimate of how much business it planned to award Oshkosh on this contract. Back in 2009, when Oshkosh beat out BAE for the right to build FMTVs for the Army, estimates were that this contract would ultimately run to 23,000 units, and be worth $2.5 billion to Oshkosh over five years.
Within just two years, however, the planned production run had run up to 26,000 FMTVs. Advance two years more, and the Pentagon says the value of this contract has swelled to $4.7 billion. That's nearly twice the cost originally anticipated. And Oshkosh still has at least another year to go on the contract.
The upshot? Thanks largely to this contract, and other Pentagon contract wins Oshkosh has notched in recent years, the company's paid down much of its debt, and returned to financial health. It sells now for less than 12 times earnings, and if it can work just a few more contracts into its backlog, and secure the 17% projected earnings growth rate that analysts have it pegged for ... it just might be worth buying.
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Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics and Textron. 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.