Next-Gen Delivery Vehicles And Critical Acquisitions Power Long-Term Growth And Market Expansion

Key Takeaways

• Transition to a dealer network for Refuse and Recycling vehicles aims to enhance market penetration and improve margins through better sales and service efficiency.
  
• Investment in next-generation delivery vehicles and expanding production in the Access equipment segment highlight a strategic focus on revenue growth and margin improvement.
  
• Transitioning to a dealer network and ramping up NGDV production pose short-term risks but are key to long-term revenue and margin improvement.

Catalysts

Provides purpose-built vehicles and equipment worldwide.

• The delivery of next-generation delivery vehicles (NGDVs) to the United States Postal Service is anticipated to significantly contribute to Oshkosh’s revenue, providing a meaningful growth avenue for the remainder of the decade. This is expected to impact future revenue growth positively.
  
• Oshkosh’s strategy of investing in market-leading products and technologies aims to enhance customer productivity and safety, fostering attractive growth prospects. This strategic focus is likely to positively impact both revenue growth and net margins by enhancing product offerings and customer satisfaction.
  
• The expansion into new products and technologies, coupled with increased production capacity, particularly in the Access equipment segment, is set to contribute to long-term success. These investments are expected to drive revenue growth and improve net margins through enhanced efficiency and product diversity.
  
• The acquisition of AUSA, a leading European manufacturer of specialty equipment, is set to offer channel synergies and position Oshkosh better in the specialty equipment market across geographies. This expansion is likely to drive targeted growth, impacting revenue positively.
  
• Transitioning the Refuse and Recycling vehicle business to a dealer network for non-fleet sales is expected to broaden customer coverage across North America, leading to a stronger life cycle business. This dealer network approach is anticipated to enhance revenue through better market penetration and potentially improve net margins by leveraging existing dealership networks for increased sales and service efficiency.

Assumptions

• Analysts are assuming Oshkosh's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.6% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $903.2 million (and earnings per share of $13.4) by about August 2027, up from $682.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.9x on those 2027 earnings, up from 10.1x today. This future PE is lower than the current PE for the US Machinery industry at 21.8x.
• Analysts expect the number of shares outstanding to decline by 0.33% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.09%, as per the Simply Wall St company report.

Risks

• The introduction of tariffs on Chinese-made goods entering the European Union may impact Oshkosh through higher costs or reduced competitiveness in the European market, potentially affecting revenue in their Access Equipment segment.
  
• With the production of next-generation delivery vehicles (NGDVs) for the United States Postal Service expected to ramp up through 2025, there could be initial ramp-up inefficiencies or increased costs that impact margins within the Defense segment.
  
• The decline in domestic JLTV production in early 2025, despite being offset by NGDV revenue, could lead to transition challenges and impact the Defense segment's revenue consistency and profitability in the short term.
  
• Increased engineering investments and operating costs, as noted in the report, could squeeze margins if not offset by corresponding revenue growth, particularly affecting segments where these investments are significant.
  
• The strategy to transition the Refuse and Recycling vehicle business to a dealer network, while potentially beneficial in the long term, could introduce short-term execution risk and impact revenues or margins if the transition does not proceed smoothly.

Valuation

• The analysts have a consensus price target of $125.46 for Oshkosh based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $181.0, and the most bearish reporting a price target of just $105.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $11.1 billion, earnings will come to $903.2 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $106.28, the analyst's price target of $125.46 is 15.3% higher.
  
• 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.