OSK Chart

Down for much of the year, Oshkosh shares perked up after the company won a big defense contract. But then earnings came out. OSK data by YCharts.

You've got to hand it to Oshkosh Corporation (NYSE:OSK). These guys sure know how to snatch defeat from the jaws of victory.

Fresh off an August win in the contest to build the U.S. Army's next-generation Humvee, Oshkosh returned to the public markets last week to announce its fiscal fourth-quarter and full-year 2015 earnings results. The news was not good, and Oshkosh stock is already down more than 11% because of it.

What went wrong?
Announcing 2015 financial results on Thursday, Oshkosh reported:

  • A 5% decline in quarterly sales, to $1.58 billion, edging out estimates slightly.
  • Unfortunately, operating profit margins took a 130-basis-point tumble, falling to just 5.5%.
  • Between the sales decline and the weaker profits on those sales, the company earned only $0.64 per share in Q4, which was 31% less than the company earned one year ago, and 18% below analyst estimates.

Oshkosh CEO Charles Szews blamed "soft" demand for access equipment and concrete mixers in Q4, but insisted that "construction activity in North America and Europe remains on the upswing" nonetheless. Szews predicted this will "lead to stronger demand for these products in coming months" -- but without explaining why an ongoing upswing didn't deliver any appreciable benefits to Oshkosh during the last three months.

What might go right
On the plus side -- and here's the real investment thesis for buying Oshkosh today -- Szews highlighted continued strong demand for the company's Mine Resistant Ambush Protected All Terrain Vehicles (M-ATVs) from international customers, where a 273-unit order was received just this past Q4 -- and a second, 1,000-unit order is currently in negotiations. This is both surprising and welcome news in light of the fact that Oshkosh's biggest military equipment customer, the U.S. government, is currently trying to extricate itself from fighting at least two wars in the Middle East.

When combined with the prospect of Oshkosh winning literally billions of dollars' worth of new work from its victory in the JLTV contract, this leaves Oshkosh feeling optimistic that it will earn between $3 and $3.40 per share in 2016, even if the construction equipment market doesn't perk back up as expected.

So is the news good or bad?
On balance, I'd have to say the earnings report was pretty bad -- maybe even as bad as all the folks selling the stock this week seem to think. As a whole, fiscal 2015 ended with Oshkosh sales down 10%, at $6.1 billion, and profits plummeting twice as much -- down 20%, at $2.90 per diluted share. The fact that guidance for current fiscal 2016 sales and earnings calls for a worst-case scenario of only 1.6% growth in the former, and 3.4% growth in the latter, doesn't lend much cause for excitement, either.

On the plus side, though, Oshkosh ended fiscal 2015 with negative free cash flow from its business, yet believes it will generate positive free cash flow of $350 million over the course of the next 12 months. If it's right about that, then the stock could soon be valued at less than nine times free cash flow, or just 11 times free cash flow when factoring in net debt (enterprise value).

It won't take much growth to justify valuations that low -- but first, Oshkosh has to stop shrinking, and start growing again.

Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 280 out of more than 75,000 rated members. 

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