Markets are naturally cyclical – they swing from high to low and back again on a consistent, if unpredictable basis over a range of time frames. The different time periods associated with any given cycle, or sometimes even the depth of a certain cycle’s direction, can shade the casual investor’s perception about a stock’s opportunity. The most recent major bull market, which extended itself over a more than ten-year time period and was only briefly interrupted by the global pandemic, is a good example. Because of both the unprecedented time period that market’s bullish run covered, and even more particularly the abnormally-extended rallies that typified the market’s bullish momentum during its last couple of years, a lot of average investors made the mistake of assuming that the market would simply continue that run.
Technically speaking, that bull market ended in February 2020, as COVID-19 made its way to North American shores and prompted not just national, but global shutdowns that shuttered entire industries for an extended period of time. The irony of the story is that while the market reacted equally as violently – every major market index plunged by about -20% in less than a month – the recovery only took slightly longer, recovering pre-pandemic highs by late spring of last year. From that point the market has resumed the direction of that much longer-term upward trend, making the “COVID bear market” look like just another bump in the road and providing a reasonable argument that the bull market really hasn’t ended, but is now in the process of extending itself into a historic twelfth year.
Coronavirus is not yet a thing of the past, and in fact will likely never be, as health experts and scientists are confident it will simply move to an “endemic” phase, where it is a constant presence in our ecosystem, with occasional spikes in infections like the flu. This year, the focus has shifted to the war in Ukraine and questions about what its long-term, global impact will be on both the geopolitical and economic stages, and clearly inflationary indicators that have already prompted the Fed to raise rates once this year, with additional, more aggressive increases being predicted in the months ahead.
For a somewhat contrarian-minded investor like me, the conditions I’ve just described mean that it’s one thing to be open to good buying opportunities right now – but it is still smart to think in very careful, selective terms about taking on new positions. For the stock market, that means not simply taking a stock’s price action – up or down – at face value without first diving into the company’s fundamentals to get a sense of what is driving current price activity. It is also a good idea to take a step back from typical metrics and think about other factors that may work in a company’s favor in the foreseeable future, or that may represent elements of risk.
Oshkosh Corporation (OSK) is a good example of what I mean. From November of 2020 to May of 2021, the stock more than doubled in price, rising quickly from around $67 to a peak at nearly $138 per share. From that point, the stock has fallen back into a long-term downward trend that has the stock pushing to a new 52-week low at around $95, and about -26% below its most recent peak in mid-January at around $124.50 per share. Their generally solid fundamental profile does show a few holes that I think have played a role in the market’s treatment of the stock over the past ten months.
Trying to take a look at the broader picture for OSK means factoring in not only where their business has been, but also where it’s going. Long established as a primary manufacturer of telehandlers, aerial work platforms, and specialty trucks for the defense, fire and emergency, concrete placements, and refuse hauling markets, OSK has signaled a strong commitment to EV product development. Their Pierce Volterra Pumper, for example, is the first electric fire truck in service in North America, with additional EV platforms in place in concrete placement, and scissor lifts. In February 2020, the company made headlines when the United States Postal Service (USPS) selected OSK to deliver 50,000 to 165,000 EV and hybrid vehicles over the next ten years in a nationwide, sustainable upgrade of the USPS fleet. More recently, the company announced an additional, $2B+ order from USPS for the same vehicles.
All of this information makes for an interesting mix for a growth-oriented investor; are these elements also enough to make the stock actually work as a legitimate value-driven, long-term opportunity? Let’s dive in to the details and see if we can decide.
Fundamental and Value Profile
Oshkosh Corporation (OSK) is a designer, manufacturer and marketer of a range of specialty vehicles and vehicle bodies, including access equipment, defense trucks and trailers, fire and emergency vehicles, concrete mixers and refuse collection vehicles. The Company’s segments include Access Equipment; Defense; Fire & Emergency, and Commercial. The Access Equipment segment consists of the operations of JLG Industries, Inc. (JLG) and JerrDan Corporation (JerrDan). The Defense segment consists of the operations of Oshkosh Defense, LLC (Oshkosh Defense). The Fire & Emergency segment consists of the operations of Pierce Manufacturing Inc. (Pierce), Oshkosh Airport Products, LLC (Airport Products) and Kewaunee Fabrications LLC (Kewaunee). The Commercial segment includes the operations of Concrete Equipment Company, Inc. (CON-E-CO), London Machinery Inc. (London), Iowa Mold Tooling Co., Inc. (IMT) and Oshkosh Commercial Products, LLC (Oshkosh Commercial). OSK has a current market cap of about $6.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by -92%, while revenues rose 13.65%. In the last quarter, earnings decreased by almost -91.5%, while sales were -13.15% lower. The company’s operating margin has survived the difficulties of the past year better than most in the industry, but hasn’t been immune to the challenges that persist; over the last twelve months, Net Income as a percentage of Revenues was 5.15% and weakened sharply in the last quarter to 0.35%.
Free Cash Flow: OSK’s free cash flow is healthy, at about $1.1 billion over the past year. This number marks a decline from the last quarter, which was $1.2 billion. The current number also translates to a Free Cash Flow Yield of 17.35%. I don’t take the company’s Free Cash Flow pattern as a complete offset of the warning flag raised by the deteriorating Net Income and negative Earnings pattern, but it does suggest that the company is still sitting on solid operating ground despite those challenges.
Debt to Equity: GRMN has a debt/equity ratio of .25, implying a conservative approach to leverage and debt management. GRMN also has $899 million in cash and liquid assets (down from about $1.1 billion in the quarter prior) versus $1.3 billion in long-term debt. Servicing their debt isn’t a problem for now – but the current earnings and net income patterns could challenge that stability if they aren’t corrected in the quarters ahead.
Dividend: OSK’s annual divided is $1.48 per share, which translates to a yield of about 1.55% at the stock’s current price. It also marks an increase from $.96 per share, per annum around the middle of 2018, $1.20 per share in 2020 and $1.32 per share last year. An increasing dividend is a strong sign of management’s confidence in its business plan and operating model. Even with the increase, it is also worth noting that OSK maintains a conservative payout ratio; the current annualized dividend is less than 25% of the company’s total earnings per share over the last twelve months.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at about $132 per share. That suggests the stock is trading at a tempting discount, with 40% upside from the stock’s current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s downward trend from its May 2021 peak at around $137.50 to its recent 52-week low at around $95; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock has been breaking down for most of the past week, which is a clear indication that bearish momentum remains high. It could have current support at around $95 right now based on the stock’s lower volatility so far today, with immediate resistance at its October low at around $98. A push above $98 should find next resistance at around $102 based on pivot low activity in late February and early March, while a drop below $95 could have downside to anywhere between $91 and $92 before finding next support.
Near-term Keys: OSK’s value proposition looks very attractive right now, but I think the stock’s current, strong bearish momentum along with the red flags shown and the company’s balance sheet are strong reasons to hold off on using this stock as a legitimate value opportunity right now. If you prefer short-term trading strategies, a break above $98 as a signal to consider buying the stock or working with call options, using $102 as a useful, short-term profit target. A drop below current support at $95 could be taken as a signal to consider shorting the stock or buying put options, with downside to next support at $91 to $92 providing a useful initial profit target on a bearish trade.