Defense And NGDV Challenges Will Drive Future Resilience

Key Takeaways

• Oshkosh's Access segment may struggle with softer market conditions and high interest rates, potentially decreasing revenue and profit margins.
  
• Increasing costs and supply chain disruptions might strain Oshkosh's costing models, impacting net margins and revenue forecasts.
  
• Oshkosh's strategic innovations and commitment to sustainability hint at potential market growth and strengthen investor confidence, despite recent share price fluctuations.

Catalysts

Provides purpose-built vehicles and equipment worldwide.

• Oshkosh's Access segment may face challenges due to softer market conditions in nonresidential construction and high interest rates, which could result in declining revenue and reduced sales throughout 2025. This implies a potential decrease in revenue and profit margin pressures due to a likely contraction in demand.
  
• The potential adverse effects on revenue from the NGDV program in the Defense segment, particularly from the progressive ramp-up and the related costs, could strain margins and earnings in the short term until full production scales by the end of 2025.
  
• Although the Vocational segment shows strong backlog and demand, the need for continued investment in production capacity might limit immediate operating margin improvements, resulting in squeezed net margins and earnings within a competitive market environment.
  
• Expected increase in tariff rates, raw material prices, or supply chain disruptions might strain Oshkosh's costing models, leading to increased pressure on net margins and potentially impacting revenue forecasts if the company cannot fully pass these costs onto consumers.
  
• The company faces pressure from adjusted pricing contracts in the Defense segment, with full benefits not materializing until late 2025 or 2026, which could depress near-term revenue potential and constrain segment profitability.

Oshkosh Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Oshkosh compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Oshkosh's revenue will decrease by 0.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.4% today to 6.7% in 3 years time.
• The bearish analysts expect earnings to reach $726.0 million (and earnings per share of $11.55) by about April 2028, up from $681.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from 8.4x today. This future PE is lower than the current PE for the US Machinery industry at 20.9x.
• Analysts expect the number of shares outstanding to decline by 1.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Oshkosh Future Earnings Per Share Growth

Risks

• Oshkosh Corporation's strong Financial Year 2024 performance with a revenue of $10.8 billion and adjusted earnings per share of $11.74, along with a 110 basis point increase in adjusted operating income margin to 10.5%, indicates robust financials and may contradict a significant share price decline by supporting stable earnings.
  
• The introduction and expected production ramp-up of the Next Generation Delivery Vehicle (NGDV) program for the U.S. Postal Service, described as one of the most significant new products in Oshkosh's history, suggest potential for future revenue growth, strengthening the company's financial position.
  
• Oshkosh's strategic focus on innovative products and technologies, including AI, autonomous refuse collection with HARR-E, and the all-electric Volterra refuse vehicles, point towards potential revenue and market positioning gains by addressing future demands in the vocational segment.
  
• The commitment to sustainable practices, evidenced by Oshkosh's inclusion in the Dow Jones Sustainability World Index for the sixth consecutive year, could enhance investor confidence in long-term growth and profitability, impacting both revenue and net margins positively.
  
• The company's outlook for 2025 anticipates growth in Vocational and Defense segments, alongside expected investments in new products and technologies, which aligns with forecasts for adjusted EPS in the range of $11. This assessment suggests resilient earnings despite market challenges.

Valuation

• The assumed bearish price target for Oshkosh is $90.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Oshkosh's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $163.0, and the most bearish reporting a price target of just $90.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $10.9 billion, earnings will come to $726.0 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $88.78, the bearish analyst price target of $90.0 is 1.4% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.