Truck Maker Oshkosh Looks Like Heavy-Duty Bargain

Shares now go for just under $40. Since the stock price has crumbled while earnings have not, the price/earnings ratio has been squashed to 9.

Founded in 1917 as the Wisconsin Duplex Auto Company, Oshkosh today makes fire and rescue trucks, cement mixers, aerial work platforms, military transport vehicles, garbage trucks and more. Boom markets in war and construction have caused a fourfold ballooning in per-share profit over the past five years. Now the U.S. housing market is in a downturn and the broader economy is slowing, while raw material costs have soared in recent years. Municipalities, faced with the prospect of lower tax revenue, are looking for cost cuts. As a result, two of Oshkosh's four divisions (two and a half, really) are struggling.

In the company's most recent quarter, reported May 1, military sales surged 47% year-over-year, but operating margin declined to 13.2 cents on the dollar from 17.3 cents. Sales of "access equipment" (lifts, mostly) increased 15%, but only because a near-doubling in foreign sales made up for a 20% decline in North America. The weak dollar surely helped. Sales dipped 7% for the fire and emergency segment and plunged 31% in the commercial one (mixers, garbage trucks). But two growing units, defense and access equipment, are larger than the two shrinking ones, and so overall results were decent. Sales inched higher to $1.8 billion while earnings per share jumped 43% to 97 cents.

Management reaffirmed 2008 guidance of $4.15 to $4.35 in earnings per share. Analysts are looking for $4.37. Notably, management also kept the quarterly dividend unchanged at a dime per share. That gives the stock a yield of 1%, just enough to squeak by the demands of our Not Just Income screen, which seeks ample dividends along with plenty of potential for share-price gains. See the screen recipe for details on the demands and use SmartMoney's stock screener to run the search for yourself anytime. It recently produced eight survivors in all.

The dividend seems miserly. Oshkosh is generating about 10% of its current market value in free cash, suggesting it could afford a 3% to 5% dividend, an aggressive round of share repurchases, or both. But the share count isn't dropping, nor the dividend rising, which leaves three broad options for the money. Oshkosh can pay down its debt; it owes a weighty $2.94 billion, largely due to its 2006 purchase of JLG Industries, a maker of aerial work platforms, for $3 billion. Recent results show only modest debt reduction. Oshkosh can also go after more acquisitions. It has bought 15 companies since 1996. Presumably, there are good deals to be had during the present industry slowdown — although the company's current debt load seems ambitious enough. Least attractive for investors, Oshkosh can also stockpile cash, although there is little sign on the company's balance sheet that it's doing so.

All told, Oshkosh isn't doing nearly as bad as its current stock price suggests. Sales are expected to rise 16% this fiscal year ending Sept. 30, while earnings per share are seen increasing 22%. Anything close to that would likely give the stock a boost.

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