Oshkosh Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Oshkosh Corporation is a specialty vehicle manufacturer focused on designing, developing, and manufacturing access equipment, defense vehicles, and vocational trucks and bodies.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Oshkosh Corporation (OSK) is an innovative, industrial company with a strong presence in niche markets, particularly defense and access equipment. It has shown to have above-average profitability, but has some vulnerability to economic cycles and other issues.

Business Overview

Oshkosh Corporation operates through three main segments: Access Equipment, Defense, and Vocational.

  • Access Equipment (48.6% of consolidated revenues during Q2 2024): This segment manufactures and markets a wide array of access equipment, including telehandlers, aerial work platforms, and related parts and services for use in construction, institutional, and general maintenance applications. The vast network of dealerships makes them one of the leaders in that market, serving customers worldwide. This segment’s sales are primarily generated in North America (over 70% in the current quarter, see page 29 of Q2 report).
  • Defense (27.9% of consolidated revenues during Q2 2024): This segment designs, manufactures, and sells tactical wheeled vehicles, and provides related parts and services, primarily for the U.S. military. This includes the Joint Light Tactical Vehicle (JLTV) program for the U.S. and allies, the Family of Medium Tactical Vehicles (FMTV) program, and a variety of vehicle systems for air transport and ground support.
  • Vocational (23.5% of consolidated revenues during Q2 2024): This segment focuses on specialty vehicles for commercial and municipal end-users, including refuse collection vehicles (where it is the industry leader), concrete mixers, and fire and emergency vehicles.

Oshkosh has moved the reporting responsibility for its Fire & Emergency segment to the Chief Technology and Strategy Officer, allowing a more singular approach to technology and strategy across the company, as stated in their latest Q2 Form 10Q report. This change does not change the company’s products or business segments, but helps unify management and strategic decision making.

  • Access Equipment: This market is sensitive to economic cycles, and demand fluctuations are dependent on construction activity. Companies that have strong distribution networks, customer lock-in and strong brand recognition generally perform better during the fluctuations.
  • Defense: The defense market is driven by government funding and geopolitical tensions. This creates opportunities for new contracts and large revenues, but it also makes the performance of the company subject to government contract changes. Long-term contracts, where the contract’s profit is subject to adjustments, can make forecasting difficult.
  • Vocational: The vocational market is less cyclical than defense and access and is primarily reliant on local municipal budgets, which are generally more stable than the federal budget. However, consolidation and competition are intensifying in this market.

Margins & Profitability

Oshkosh has a history of strong profitability.

  • In Q2 of 2024, the consolidated gross margin was 16.8%, an improvement over 14.4% last year. This was mainly driven by pricing improvements, as well as a higher margin mix of products and lower material costs.
  • EBITDA was 10.9% and net income was 7%.
  • For the year ending 2023, consolidated gross margin was 14.3%. While this may not seem very high, many of the costs are embedded into the manufacturing process due to complex supply chains and regulatory hurdles that are difficult for competitors to replicate.
  • Oshkosh is a heavily capital intensive business, meaning that they need to invest a lot in PP&E to grow.

Competitive Landscape

  • The Access segment, although highly competitive, has low switching costs and an absence of major players controlling the market. With that in mind, large players like JLG (Oshkosh’s sub-brand in the access segment) have been able to capitalize on their scale and network to gain an advantage.
  • In the Defense segment, Oshkosh competes primarily on price, production capability, and performance of specialized military vehicles. A large portion of the company’s business comes from contracts with the U.S. government, and it needs to maintain strong relationships with government procurement agencies to win contracts and retain them.
  • The Vocational segment is made up of more fragmented markets where regional or local players are present, the company tries to leverage economies of scale and low input costs to increase margins. The company has done this by acquiring companies in the niche market and scaling production of them within the larger umbrella of Oshkosh.

What Makes the Company Different

Oshkosh’s competitive advantage comes from a mix of its scale, strong brands in their specific markets (Access, Fire & Emergency, Military, and Refuse Collection), and proprietary technology. A large portion of the company’s revenue comes from large contracts with the government. Also, many of their niche businesses are heavily regulated or have unique cost advantages like location, making competitors less likely to attack. While it has a history of creating strong businesses with moats, the company also seems susceptible to changes in policy or market cycles, which might hurt the company’s competitive advantages.

Financials

  • Revenues: Oshkosh Corporation reported net sales of $2.74 billion for the quarter ended September 30, 2024, which is an increase of 10.6% compared to $2.48 billion in the same quarter of 2023. For the nine months ended September 30, 2024, it is $7.91 billion compared to $6.85 billion in 2023, which is a 15.5% increase.
  • Profitability: They had a net income of $183.7 million for the quarter ended September 30, 2024. This number was $156.5 for the nine months ended September 30, 2024. The net income margins for both are 6.7% and 4.8%, respectively. This was a significant jump from previous results for the company, and a focus from its board has been to increase margins (see last years commentary).
  • Balance Sheet: As of September 30, 2024, Oshkosh has a total of $9.77 billion in assets. Their liabilities are $5.17 billion, and a large portion of the total debt (debt and credit facilities) is $3.19 billion. The total cash on hand at the same time was $160.0 million.
  • Cash Flow: For the first nine months of the year, cash from operations was $141.6 million. Oshkosh had negative cash flow for the first six months, which means that their operations, along with acquisitions and investments, are creating a substantial burn of cash. Also, despite having high revenues they are having issues with collecting the payments from customers in time.

The company is facing a large amount of deferred tax liabilities in the form of tax credits (102 million in the current quarter, see page 17 of the Q2 10Q report), as well as warranty-related liabilities ($60 million). The company needs to have proper planning for the use of this capital.

Moat Rating: 3/5

Oshkosh exhibits a narrow moat. While it operates in specialized areas with a good track record, there are some potential risks that could threaten its position.

  • Positive Aspects:
    • Strong Brands: Oshkosh is a leading brand in its respective markets, such as JLG in the access equipment segment, which generates high margins.
    • Distribution Networks: It has a large distribution network for its access equipment, especially within North America, which provides a cost and scale advantage to its operations. It is hard to replicate the distribution network.
    • Regulatory Advantages: Its defense segment relies on exclusive contracts with government agencies, as well as high regulatory requirements, creating a strong, difficult to replicate moat.
    • Niche Domination: The company’s presence in niche markets like concrete mixers and waste collection vehicles creates a mini-monopoly.
    • Switching Costs: Some of the industries and products it deals with, like large-scale, specialized trucks for various applications, have some implicit switching costs related to their complex nature and specialization.
  • Negative Aspects
    • Competition: Most of its operations are in competitive industries, with constant threats from new competitors.
    • Cyclical Nature: The company, and its access equipment specifically, are exposed to the fluctuations of the market and the business cycle, and might suffer in times of recession and market downturn.
    • Commodity Nature: The company is dependent on commodity prices (e.g. aluminum, steel, etc.), and has to continuously improve productivity and reduce input costs in order to remain competitive.
    • Technology Disruption: The company needs to constantly improve and innovate to compete with new companies or the potential of market erosion by substitutes.
    • Reliance on Government Contracts: While generating large stable revenues, contracts with governmental organizations are at risk of not being renewed or suffering from budget changes.
    • High Capital Expenditures: The company’s reliance on physical assets means they need to continuously maintain and upgrade them, which is a continuous drag on cash and profits.

Understandability: 3/5

Oshkosh’s business, while not overly complex on the surface, requires careful consideration due to the diverse nature of the business segments and a large amount of external factors at play. A basic understanding of manufacturing processes and the governmental and institutional markets the company operates in is needed. The company’s financials are also a bit complicated because of its large debt, diverse acquisitions and joint ventures, and significant operations in overseas markets. So, while it’s not rocket science, it does require some studying.

Balance Sheet Health: 4/5

The balance sheet is healthy, but requires a bit of monitoring due to the significant debt, as well as a reliance on acquisitions for growth.

  • Debt Level: The company has a total debt of $3.19 billion, which is more than the total equity.
  • Cash on Hand: The cash on hand of $160.0 million is lower than the annual interest payment of approximately $220 million. They rely heavily on revolving credit facilities.
  • Free Cash Flow: The company’s cash flow from operations is not covering their investing needs, and they rely on debt to fund growth.
  • Solvency: Despite a high debt load, most of their debt is secured at relatively low interest rates and the company’s credit ratings have stabilized the credit risk.

Recent Concerns, Controversies, and Problems

  • Supply Chain Issues: Oshkosh, like many other companies, has faced challenges with supply chains, mainly in parts and input material acquisition.
  • Material Costs and Labor Costs: Inflation has hurt the company in terms of material and labor costs, putting pressure on margins. These costs might be offset by increased revenues but only over time.
  • AeroTech Acquisition: The company acquired AeroTech in August of 2023 for $803 million to expand its vocational business, however, the impact of the acquisition is still under scrutiny. While it has shown some signs of improving margins in the vocational segment, it’s not clear if these gains will materialize for a substantial time, and a large amount of goodwill is associated with the acquisition.
  • Government Contracts: A large amount of the company’s future earnings is tied to large, long-term government contracts, especially the JLTV contract. Changes in these contracts could significantly affect their financial performance, and the threat of cancelation might affect future revenues.

What does management think

The management has tried to reassure investors about these concerns by claiming that they have been proactive in resolving supply chain issues, passing through increased prices, and optimizing their cost structure. They are also focusing on securing more diversified contracts, as well as diversifying into markets with higher profit margins. However, they noted that demand is still strong but that some customers are extending deliveries and pushing into the next year. Overall, there is a high confidence in the performance and the future outlook of the company.

Conclusion

Oshkosh is a company that operates in several distinct business segments, that each carry their own unique advantages and disadvantages. The company has strong brands and is dominant in the niche markets that it operates, but also faces some uncertainty related to government and geopolitical factors. Overall, the company’s operations are promising, especially with increased profitability in the latest reports. However, if the company can’t control costs or deal with a downturn in the markets that it serves, the company’s valuations can be at risk. A narrow moat, a good balance sheet, and a decent level of understandability make Oshkosh a viable choice for investment, but not without its risks.