Why I'm Staying Away From This Stock for Now

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U.S. spending cuts have hit the entire defense industry, and players are feeling the pinch. Take Oshkosh (NYS: OSK) , for example. The U.S. military's largest armored vehicle supplier's third-quarter earnings slumped a staggering 68% as sales weakened. Does this spell an end to Oshkosh's happy days? Only a deeper look can help Fools judge whether the stock is an investment for the future.

Operational performance
It has been a sad time for Oshkosh. Its revenue growth rate has completely flipped from a compounded average of 17.1% over the last five years to a one-year rate of -17.9%. The primary reason behind this has been declining sales for mine-resistant ambush-protected armored vehicles and costs involved in transitioning from these to the newer family of medium tactical vehicles.

Even more miserable has been the Wisconsin-based company's bottom-line growth rate. From a five-year compounded rate of 5.1%, it now stands at a depressing rate of -67.6% in the past year. Clearly, this change from black to red is nothing to cheer about.

Growth and stability
Oshkosh has been primarily focusing on ramping up FMTV production now. But the sad part is, while fresh FMTV orders are slowly pouring in, the expected profitability from these vehicles is still some time away.

Apart from this, Oshkosh is also restructuring some segments, increasing focus on nondefense segments and expanding in emerging markets. Of these, the second and third moves are especially critical at a time when all defense companies are scrambling to gain a greater share of the smaller U.S. defense budget cake. I'd also like to see higher overseas sales for Oshkosh, which is just about 10% today.

Oshkosh's debt levels have been high since an acquisition it made some years ago. Though the company has been reducing debt levels gradually, its total debt-to-equity ratio remains somewhat moderate at 68.5%. A depleting cash balance and worsening margins add to the balance sheet gloom.

Value insights
Let's see how Oshkosh's valuation stacks up next to its peers:

Company

Trailing P/E

Forward P/E

P/BV

Oshkosh4.59.11.0
General Dynamics (NYS: GD) 8.47.71.5
Force Protection (NAS: FRPT) NM*9.30.9
Navistar (NYS: NAV) 1.85.53.6
Paccar (NAS: PCAR) 18.510.62.2

Source: Capital IQ, a division of Standard & Poor's. NM = negative.

Like my Foolish colleague Ilan Moscovitz, you might consider Oshkosh if you look at its terribly low trailing P/E multiple, or even the relatively low price-to-book value. But moving on to the estimated P/E, the excitement fizzles out.

The high double-digit forward P/E suggests that Oshkosh's earnings are expected to weaken in the future. This isn't surprising when the company's major customer (the U.S. government) accounting for nearly 70% of its total sales is planning some serious budget cuts.

The Foolish bottom line
Oshkosh's future is not looking too bright right now, nor are there other tempting attractions such as dividends for investors. With a future largely dependent on military orders, Oshkosh may take some time before it can turn things around and present better financials. Till then, prudent Fools might just want to wait a bit before getting into the stock.   

Stay updated on Oshkosh's news and analysis by clicking here to add it to your stock watchlist.

At the time this article was published Neha Chamaria does not own shares of any of the companies mentioned in this article.The Motley Fool owns shares of Oshkosh and General Dynamics.Motley Fool newsletter serviceshave recommended buying shares of Paccar. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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