Oshkosh - Brace yourself for falling earnings

Latest earnings report is just the beginning.

I somewhat feel bad for Oshkosh. Prior to JLG acquisition, the company used to be a fairly stable business selling trucks and ambulances to the government/defense department. However after acquiring JLG in 2007, it’s getting almost half of its revenues from a highly cyclical aerial platform and telehanders business that’s about to fall off the cliff.

While Terex, its main competitor in the segment, can nurture a hope of being saved by international markets (of which I’m skeptical given Europe should promptly follow the U.S. into the recession club), Oshkosh derives 75% of its access equipment revenue from North America.

Simple statistic: JLG telehandler unit sales in 2000 were 15K. In 2002 they were around 8K, where they stayed until 2004. Same story for the overall aerial work platform U.S. market: 60K units in 2000, 25K in 2002. The industry sales for 07 stand at around 70K. Morale: this is an extremely cyclical market which is significantly above its long-term average and is bound to revert back to earth, while painfully hitting the ground on the way.

Valuation. Valuation is 13X 07 EPS which seems reasonable if you believe a) we’re at normalized revenue levels b) we’re at normalized margins. Both of those are unfortunately not true. Margins for Oshkosh prior to acquisition have historically averaged 8%, while Terex (closest proxy to aerial segment) also averaged 8% (with variation between 10% in 1999 and 3% in 2003). Right now the margins are at 9.4%. Revenue growth going forward should be GDP-like, however with normalized access segment revenues around 20% less than now. That means normalized EBIT is around $450M. At 11X multiple, TEV is ~$5B. Subtract company’s massive $3B of debt, and we get $2B of equity value, or ~$26 per share. However I wouldn’t even regard this number as the stock’s absolute bottom: as margins get squeezed on decreased access equipment sales, with large interest payments, I wouldn’t be surprised if we see the stock at $20 in a year.