Oshkosh

A China Based Cloud Play in the Fertilizer Vertical with a Social Networking Twist
Jake Rosser June 16, 2011

Coho Capital
Coho Capital is a long-only investment partnership premised upon Warren Buffets original partnership. We are a go anywhere Fund with a wide investment mandate to capture value wherever it may be found. We adhere to a concentrated style and typically hold between 25-30 intensely researched positions. We manage risk through a deep understanding in what we own, avoiding leverage and insisting on companies with positive free cash flow and strong balance sheets. Portfolio construction parameters focus on minimizing industry correlations and diversifying holdings across geographies and market cap sizes. We eat our own cooking. All of the Portfolio Managers investable assets outside of real estate are invested in the Fund.

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Investment Approach
Coho Capital invests in easily understood business with positive free cash flow and improving financial metrics. Looking for wide discounts to intrinsic value with downside protected by assets, stable free cash flow generation or the quality of the business franchise. Seek to benefit from time arbitrage with a typical time horizon of two to three years. Investment candidates tend to be experiencing temporary duress and are typically out of favor or ignored.

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Whats Out of Favor Now?

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My Son Would Love This Company

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Oshkosh (OSK) Operates in Four Segments:

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Oshkosh, By Gosh its Cheap

Market value $2.36 Billion, Enterprise value of $3.09 billion EV/EBITDA 3.1 2010 FCF - $570 Million, FCF yield of 24% 2011 P/E 7.7 compared to an average annual P/E of 12.0 P/S 0.30 Current enterprise value of $3.09 billion is below the $3.2 billion Oshkosh paid to acquire JLG in 2006. Earnings yield of 26.7% and a return on capital of 75.9% making it the 5th highest rated stock in the market according to Joel Greenblatts Magic Formula.

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Why is it Cheap?
Company concerns:
Acquisition of lift maker, JLG, at the peak of the market cycle led to a perilously high debt load and an erosion of trust in managements capital allocation abilities. Transition from production of high volume, high margin Mine Resistant Ambush Protected (MRAP) vehicles to low margin low volume Family of Medium Tactical Vehicles (FMTV) has negatively impacted recent results: Q2 revenue and operating income declined by 39.1% and 73.2% respectively.

Macro concerns:
Defense and Fire and Emergency are reliant upon government spending. Commercial and Access segments services the construction market which remains anemic.

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What is the Market Missing?

Myopic focus on short-term results overstates the threat to future defense revenue streams. The cessation of Oshkoshs lucrative MRAP contract made for a dramatic comparison on year over year quarterly numbers. Demand for parts and services on MRAP vehicles will lead to high margin recurring revenues streams. Q2 results reflected the start-up costs associated with production of the new FMTV but do not yet include revenue from the contract. Were results really that bad? Even with these headwinds, EPS came in at $0.74, equivalent to $2.96 annualized or a 8.8 P/E.

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What is The Market Missing?

Strong balance sheet with $637 million in net debt
Reduced debt by $736 million in 2010.

Additional deleveraging should provide a tailwind to future EPS.

Reduced debt by nearly $2 billion over the last three years. With $550 million in FCF in 2010, OSK could pay off its remaining debt in 1.3 years. Reduction of outstanding debt would result in additional earnings accretion of $0.95 in annual EPS Cash has grown from $339 million at the end of September to $417 million at the end of April.

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Oshkosh has thrived through multiple cycles

Founded in 1917. #1 in each of its market segments with the exception of defense, which is hard to measure. Over 14 years, revenues grew every year except 2. Earnings compounded by 22% a year over 10 years Cash flow grew by 20% a year over 10 years.

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Valuation scenarios
Averaged a PE ratio of 12.0 over the past ten years. A reversion to its historical P/E ratio would result in a return of 64% from its current forward P/E of 7.3. Earn $5.50 per share in FCF next year. A reasonable 10x multiple on FCF would result in a share price of $55.50 or a return of 114% from current levels.

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What Could Go Wrong?

Construction spending could remain constrained. Withdrawal of Federal stimulus could crimp state budgets further. Municipal budgets remain constrained due to reliance on property taxes. Sales to the US government account for 72% of total revenues.

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Regulatory risks are unpredictable

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What Could Go Right?

State tax revenues grew 9.1% in Q1, the 5th straight quarter of growth and fastest rate in 5 years.
The majority of this growth stems from income and sales tax collections rather than tax increases. If the current pace of revenue growth holds it could shave projected budge gaps by roughly $20 billion. Goldman Sachs

Spending by municipalities for emergency preparedness and homeland security is not completely discretionary. Follow-on Defense orders Cost reduction initiatives could mitigate the impact of lower defense revenues. Access equipment orders increased 73% last quarter and backlog tripled to $596 million.
New manufacturing facility in Tianjin, should aid in expansion of Asian revenues.

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Margin of Safety

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Conclusion
Classic Dhando stock high uncertainty but little downside Generous margin of safety
If nobody owns something, demand for it (and thus the price) can only go up and by going from taboo, to even just tolerated, it can perform quite well Howard Marks

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Oshkosh
A China Based Cloud Play in the Fertilizer Vertical with a Social Networking Twist
Jake Rosser June 16, 2011