Pentagon’s $1B Contract is a Game-Changer for Oshkosh (OSK)

“Oshkosh, we talked about last week when we got that billion dollar contract for our troops over in Afghanistan, getting yet another buy rating. By the way, this stock year to date up nearly 125%.” Fox Business Network 7/6/2009

The Department of Defense awarded a substantial contract for armored All Terrain Vehicles to truck maker Oshkosh Corp. (OSK) of Oshkosh, Wisconsin. This has been a major shot in the arm for company as the $1.05 billion contract for vehicles should provide substantial revenue for at least the next few quarters. The stock was up nearly 30% the day after the contract was announced, and subsequent analyst upgrades have continued the upward trend, bringing the stock up nearly 50% higher than just one week ago. This contract comes at an opportune time for Oshkosh as the slowdown in construction and capital expenditures has lowered the demand for Oshkosh’s trucks, ambulances, fire trucks, cranes, etc. The company swung to a loss for the first two quarters of the fiscal 2009, but with this contract in hand the company should be able to return to profitability rather quickly.

After taking a look at the contract there are a few interesting features that stand out. First, Oshkosh was so confident that their bid was going to win the contract that they actually started production prior to the announcement. There is no doubt that Oshkosh had unutilized capacity, and this potentially risky move might have been a little bit of an encouragement to the DoD, after all Oshkosh will be able to deliver the first shipment sooner now.

Perhaps the most compelling factor was the cost savings that Oshkosh was able to provide in this contract. Considering the Pentagon had stated that it expected to spend upwards of $12 billion for 5,244 vehicles, the $1.05 billion contract 2,244 Oshkosh MRAP armored vehicles. Furthermore, the contract is a “firm fixed price delivery” order, meaning Oshkosh will not be able to ask for more funding if the project takes longer than expected. This contract will supply the military with 43% of the vehicles that were requested for quite a discount to what they had anticipated paying, and of course there is the potential to fill the rest of that need later on.

There is no doubt that the contract has provided a boost to Oshkosh stock, and also stabilizes the company’s revenues going forward. Upgrades have been frequent for this stock recently; it was just days ago OSK was down in the dumps with a debt-laden balance sheet and under utilized factories. The analyst from Keybanc called this contract a game-changer for the stock, and lifted his price target to $30. Hopefully, this contract will keep factories churning until the private sector is ready to start buying Oshkosh’s products again.

At Ockham, we have placed a Fairly Valued rating on Oshkosh because the stock is no longer particularly undervalued. That is understandable after an increase of about 50% in the stock price after just 3 trading sessions. That being said, we are not saying that the stock’s appreciation is unwarranted. The government’s contract has given a lifeline to the company and appears to be a win for the firm, the DoD, and the people of Oshkosh. The Mayor of Oshkosh was on Fox Business Network, and he was pleased to see his town’s future looking brighter.

“I’m sure that every town or every individual has their own opinion on stimulus. And I’m sure for some it’s gonna work and for some it’s not. But I’m here to tell you for Oshkosh , Wisconsin, it’s gonna work and it’s gonna put a lot of people back to work that lost their jobs. Like any other community throughout the United States, we have some flooding problems here in Oshkosh that need to be addressed and getting these people back to work, I’m telling you, is just absolutely phenomenal.” –Paul Esslinger Fox Business Network 7/6/2009

Pentagon’s $1B Contract is a Game-Changer for Oshkosh

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

1 Comment on Pentagon’s $1B Contract is a Game-Changer for Oshkosh (OSK)

Leave a Reply

Your email address will not be published.