Oshkosh Earnings: Strengthening Demand Drives Sales and Profit Margin Growth

Oshkosh OSK posted solid third-quarter earnings, leading us to increase our fair value estimate by nearly 7% to $110 (from $103 previously). We attribute nearly 6 percentage points of the fair value increase to the time value of money since our last update, with the balance coming from upward adjustments to our near-term forecast.

We were encouraged to hear supply chains continued to improve, echoing management’s commentary from last quarter. Recall, the company had to contend with rising inflation and manufacturing inefficiencies in 2022, which significantly pressured operating margins.

Turning to the quarter, access equipment benefited from strong demand (sales up 27% year on year), largely due to increased infrastructure, mega projects, and industrial construction spending. We expect infrastructure spending to increase over the next few quarters. In addition, the average fleet age of access equipment remains elevated, which we expect will lead to replacement demand. This backdrop gives us confidence to forecast mid-single-digit sales growth in 2024.

Defense sales continue to be challenged as expected (down over 3% year on year). Recall, that Oshkosh lost out on the joint light tactical vehicle contract recompete to AM General. Oshkosh will continue to supply the JLTV program for about another year. However, the company plans to sell the JLTV to international customers beyond 2024 (at lower volumes), which will slightly offset lost sales domestically. We’re projecting mid-single-digit sales growth compared with 2023, which is shaping up to be an easier comparison period.

On valuation, we believe Oshkosh’s shares trade roughly 18% below our $110 fair value estimate. We think the market is anchoring on the challenges in the defense business. Our valuation takes into account longer-term opportunities in defense, for example, the U.S. Postal Service contract, which we think can somewhat make up for the JLTV contract loss.