Like its motorized industrial lifts, shares of Oshkosh Corporation (NYSE:OSK) are climbing to new heights — and may not be done.
The mid cap strung together a five-day winning streak last week, capping a 13% August 2023 surge that defied a bad month for U.S stock indices. It is up nearly 40% since June 1st compared to 10% for the S&P 400 index.
Oshkosh is quickly approaching its highest level in 18 months thanks to back-to-back earnings blowouts that are attracting growth and value investors alike. Second quarter earnings per share (EPS) skyrocketed 556% year-over-year to $2.69 and topped Wall Street expectations by more than $1.00. Needless to say, analysts are now playing catch up.
Since its blockbuster Q2 report, Oshkosh has received two upgrades to buy and a bunch of target price increases. Analyst targets are creeping back into the $ 120s and $ 130s for the first time since the stock hit $137 in May 2021. Here’s why the bulls suggest riding this momentum play into 2024.
#1 - The Fundamentals Are Improving
Like other domestic manufacturers, Oshkosh was slowed by supply chain disruptions and cost inflation for the better part of 2021-2022. Those challenges are seemingly in the rearview mirror; revenue growth is accelerating, and profit margins are expanding — an ideal combination for fundamental investors. Better yet, this doesn’t appear to be a temporary phenomenon.
Through the end of Q2, Oshkosh boasted a $15 billion order backlog that was up 15% from the prior year. The growth is largely due to rising demand for access equipment that is used to build e-commerce warehouses and data centers. The company’s reputation as a leading provider of aerial platforms, carriers and telehandlers is making it a go-to destination for contractors and rental companies involved with constructing these sprawling industrial structures. Going forward, Oshkosh is positioned to benefit from these online shopping and digital transformation themes as well as government infrastructure spending.
With cash flow on the upswing, Oshkosh’s financial statements are strengthening. The balance sheet has $355 million in cash and a manageable $600 million in debt, which comprises less than 20% of the capital structure. This affords management plenty of breathing room when it comes to funding growth projects or seeking additional capital. It also means good flexibility for dividend payments. The stock’s 1.6% yield is below the sector average — but has a lot of room for dividend growth.
#2 - Room for Multiple Expansion
Due to the strong first-half order trends and an expanding backlog, management raised its 2023 profit guidance by a whopping 33%. It now expects adjusted EPS of $8.00. This gives the stock a 2023 P/E ratio of around 13x, which is at the low end of its 10x to 20x historical range. This is a steal, considering profits are forecast to more than double this year and grow further in 2024.
Even after running from $72.09 to $106.13 over the last few months, OSK is undervalued relative to construction machinery and heavy transportation equipment peers. Fellow mid-caps Alamo Group (16x), Trinity Industries (19x) and Federal Signal (25x) trade at higher 2023 multiples despite having less compelling long-term growth drivers.
#3 - Hedge Funds Are Coming on Board
Oshkosh’s improving growth outlook and attractive valuation are also catching the attention of hedge fund managers. In the second quarter of this year, hedge funds increased their OSK holdings to nearly 2.5 million shares.
Edgar Wachenheim’s Greenhaven Associates boosted its stake 20% to more than $200 million, and two hedgies (Echo Street Capital and Steinberg Asset Management) started new positions. Growing hedge fund interest is often perceived as a bullish signal because of the group’s extensive research resources and propensity for making outsized bets.
Bonus #4 - Bullish Technical Patterns
When OSK gapped up on August 1st (post-earnings), the move came in more than three times the average volume. A bullish technical development in its own right, it also set the stage for a bullish crossover of the 50-day and 200-day moving averages. Although these lines have crisscrossed frequently in recent years, sustained support from the 50-day could produce a lengthy uptrend. The current ‘cup-shaped’ pattern on the daily chart may also be a bullish signal. If OSK can break through resistance at $107, it would need an aerial platform to reach the next resistance level of around $125.