If you want to buy cyclical companies, you've got to be willing to either buy and sell opportunistically, or hold for a very long time. With some suggestions now that OshkoshTruck (NYSE:OSK) is at or near the peak of the cycle, it may be time for shareholders to decide if they are short-term renters or long-term owners.
Third-quarter results looked pretty strong in absolute terms. Sales grew 36.5%, and all units contributed double-digit sales growth. Margins, though, were not quite so strong. Gross margins dropped by about 140 basis points, and operating margins fell 50 basis points. As a result, net income growth was strong at 26%, but not as strong as the top-line result.
Smallest in terms of revenue, the fire and emergency vehicle business showed the most growth for the quarter. Sales were up more than 56%, and operating income was up more than 75%, as the company saw strong orders for fire and airport products and a favorable mix of more profitable products.
The defense business was also strong, with revenue climbing more than 47% and operating income growing more than 35%. The commercial business, though, was not so strong. Sales were up more than 18%, but operating income fell 46%. Results here were hurt by a combination of a workforce reduction charge, ongoing losses in the European refuse business, and unfavorable pricing relative to steel and component expenses.
Management guidance was a mixed bag. Though the numbers offered by management ($4.30 for fiscal '05 and $4.80 to $5 for fiscal '06) aren't bad in and of themselves, they are lower than current analyst estimates. That would suggest to this Fool that the Street has caught up to the story at Oshkosh, and we may be past the high-growth phase of this cycle.
I think Oshkosh is a fine company, but I'm not so sure that it's a wise move to pay more than 20 times trailing earnings for a company that is likely looking at low-teen to mid-teen growth for the next few years. Everyone knows that the market for trucks has been pretty strong, and I just don't believe there is any underappreciated value here.
Maybe ongoing strength in fire/rescue and defense, as well as improvements in commercial trucks, will prove me wrong, but I see nothing wrong with taking a somewhat suspicious and value-conscious view of cyclicals like Oshkosh.
More on the makers of big rigs:
Oshkosh may not be underappreciated, but designer profits can still be found in the stock market's bargain bins. Just ask Philip Durell. Take a no-risk free trial to his Motley Fool Inside Value newsletter today.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
