A Deal on Wheels

Expect those growth rates to moderate. Current forecasts call for the company's earnings per share to climb 24% in fiscal 2006 and 13% in fiscal 2007. Yet there's reason to believe Oshkosh shares, despite their recent run-up, are too cheap. They turned up recently in our midcap screen.

Midcaps, or stocks with market capitalizations (share price times number of shares outstanding) of around $1 billion to $5 billion, represent our favorite slice of the market. The best midcap companies combine the financial stability most commonly associated with large companies with the potential for brisk growth exhibited by small ones. As a class, they produce impressive performance. The Standard & Poor's Midcap 400 index, for example, has returned an average of 14.2% a year over the past 10 years. That tops the Small Cap 600 index's 12.4% average return and the 9.3% average gain by the large-cap S&P 500.

Our midcap screen is designed to help you identify the most promising middleweights the market has to offer. It looks for strong sales and earnings growth over the past year and projections for continued healthy earnings growth over the next five years. Debt levels must be manageable and analyst recommendations glowing. And each stock must have a price/earnings-to-growth, or PEG, ratio below 1.0. The PEG ratio divides a stock's price/earnings ratio by its long-term earnings growth forecast. The lower the resulting number, the better. The broad market's PEG right now is about 1.5. So our screen looks for stocks that appear at least a third cheaper than the rest of the market relative to their growth prospects.

See our recipe for details on all of our screen criteria. And use our stock screener anytime to run the search for yourself. Recently it produced a list of 10 survivors from a starting database of more than 8,000. Let's look at Oshkosh.

Based in the Wisconsin town from which it takes its name, Oshkosh owns a long list of vehicle brands including Pierce fire trucks, McNeilus cement mixers, Jerr-Dan tow trucks and, of course, a broad array of Oshkosh trucks. The company has completed 11 acquisitions since 1996. Its trailing 12-month sales total $3.0 billion. Defense and commercial trucks contribute slightly more than a third apiece of that total; fire and emergency trucks, slightly less than a third.

Military trucks are still the company's main growth driver. Its fourth-quarter results, reported Nov. 1, showed defense sales soaring 58% year-over-year, vs. increases of 6% for fire and emergency sales and 14% for commercial sales. Total sales swelled 27% to $824 million. Earnings climbed 42% to $43 million, or 58 cents a share, topping estimates by a penny. The company's backlog of orders increased by 24% year-over-year; its military backlog jumped 35%.

Of course, the war in Iraq is the main contributor at the moment to Oshkosh's strong military demand. Sales of new military vehicles may dip next year, barring new contract wins. But the company's defense segment still looks poised for a good year, say analysts. "Emerging demand for remanufacturing of the large fleet of overworked U.S. Army and Marine Corps trucks that have seen service in Iraq and ongoing strong armor and replacement parts demand appear capable of more than offsetting [expiring military truck contracts]," wrote Robert McCarthy, an analyst with Milwaukee-based investment bank Robert W. Baird & Co., in a Nov. 2 research note. McCarthy figures strong remanufacturing sales could continue through the decade while Oshkosh's commercial and emergency truck businesses strengthen.

Oshkosh forecasts a low-single-digit sales pick-up in its commercial business in fiscal 2006. The company has a reputation for issuing conservative guidance. This number is no exception, according to McCarthy. "If we assume industry pricing is up at least 10% (we estimate that Oshkosh represents more than 50% of domestic industry volume), then Oshkosh is forecasting 2-3% revenue growth in a market where available revenue might grow 15-20%," he points out. "Given Oshkosh's business model that has leveraged superior product support into its currently impressive market share positions, this simply looks too conservative." (McCarthy doesn't own shares of Oshkosh; Robert W. Baird & Co. doesn't have an investment-banking relationship with the company.)

All told, analysts figure that Oshkosh will boost its earnings by 17.3% a year, on average, over the next five years. That makes the stock's present price/earnings ratio of 16.4, like its PEG ratio of 0.9, seem too modest. The average truck maker carries a PEG ratio of 1.2 right now. The stock's fourfold climb over the past five years will no doubt keep some bargain hunters at bay. Don't be one of them. Oshkosh shares look likely to motor higher still.