It's been a couple of weeks now since Oshkosh(NYSE: OSK), a manufacturer of trucks for both the military and civilian markets, reported its Q4 results. The stock is down about 10% since those earnings came out -- but not because of earnings.
In fact, Oshkosh stock held up quite well for several days post-earnings, even rising a few percentage points, despite earning about $0.13 less than expected. This was thanks to strong revenue performance in the quarter (sales up 23%) and guidance for more of the same. (Oshkosh forecast 2023 sales of $8.4 billion and profits near $5.50 per share, or nearly twice what it earned in 2022.) If Oshkosh can deliver on its promises, the stock would appear to be quite a good bargain at its current valuation of less than 19 times free cash flow, and with a near-25% projected growth rate.
But I wouldn't recommend you count too heavily on Oshkosh hitting those numbers.
A good quarter for Oshkosh, but...
Just 10 days after Oshkosh released its Q4 earnings, and after it announced its bullish forecast for 2023, Oshkosh stock ran into a ditch. As the U.S. Army announced last week, it is taking away Oshkosh's contract to build Joint Light Tactical Vehicles (JLTVs), which Oshkosh has held for eight long years, and giving the contract to privately held AM General instead.
It's a remarkable turnaround in fortunes for AM General, the South Bend, Indiana-based company that for decades was best known as the key supplier of the Army's fleet of M998 High Mobility Multi-Purpose Wheeled Vehicles -- HMMWVs, better known as "Humvees" -- and that had hoped to build the Humvees replacement, the JLTV, as well.
Instead, Oshkosh won that contract in 2015, and that provided the spark that made Oshkosh stock explode to more than double its pre-contract price through mid-2021. The question now is whether Oshkosh will be able to maintain that momentum in the absence of literal billions of government dollars earmarked for JLTV manufacturing -- an absence that could drag on for more than a decade.
...a bad decade to come
As DefenseNews.com reported last week, the contract that AM General won -- and Oshkosh lost -- will begin with an initial five-year production period, and could be extended through five subsequent, one-year option periods, for 10 years in all. Although AM General will start small with an initial $231 million award, this contract could eventually see AM General produce nearly 21,000 JLTVs and nearly 10,000 trailers for the armored truck -- and collect $8.7 billion in revenue for its work.
In short, this is great news for AM General, but bad news for Oshkosh.
What it means for Oshkosh investors
Exactly how bad is it, though?
Actually, that may be the most surprising news in this story, and the best news for Oshkosh shareholders -- because investors might not actually feel as much pain from this contract loss as you'd expect.
Although the JLTV has been big business for Oshkosh -- with 19,000 units produced to-date -- it's not necessarily Oshkosh's most profitable business. Indeed, according to data provide by S&P Global Market Intelligence, Oshkosh Defense was the company's least profitable business last year, yielding operating profit margins of only 2.1% -- less than half the company's overall operating profit margin of 4.5%, and much less than the 7.9% margin the company earns on Access Equipment sales, for example, or the 8.5% margins it gets from sales of fire trucks and ambulances!
Things haven't always been this bad. Pre-pandemic, for example, in 2019, Oshkosh actually earned a very respectable 9.9% margin on its defense sales -- but even then, the company's profit margin in access equipment was significantly higher at 12.3%.
So long story short, while Oshkosh will certainly take a hit from losing its JLTV franchise, the company could still motor along quite well -- and indeed, potentially produce even more profits -- if it can replace that defense revenue with a few more sales of aerial work platforms, fire engines, and ambulances. Heck, Oshkosh could do just fine if it simply replaced lost JLTV sales with sales of garbage trucks -- a 5.6% profit margin business for Oshkosh!
Success, however, is not assured. In order for Oshkosh stock to succeed going forward -- and deliver on the potential of its apparently cheap stock price -- the company must successfully pivot away from some of its military business, and lean into growing its commercial trucks business instead. The next time Oshkosh reports earnings (that's on April 28, by the way), I'd strongly suggest you pay close attention to whether management has a good plan to make that happen.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
