Over the past six months, Oshkosh has been a great trade. While the S&P 500 was flat, the stock price has climbed by 14.2% to $111.54 per share. This run-up might have investors contemplating their next move.
Is there a buying opportunity in Oshkosh, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Oshkosh Not Exciting?
Despite the momentum, we don't have much confidence in Oshkosh. Here are three reasons why we avoid OSK and a stock we'd rather own.
1. Weak Backlog Growth Points to Soft Demand
We can better understand Heavy Transportation Equipment companies by analyzing their backlog. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Oshkosh’s future revenue streams.
Oshkosh’s backlog came in at $14.55 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 4%. This performance was underwhelming and suggests that increasing competition is causing challenges in winning new orders. 
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Oshkosh’s revenue to stall, a deceleration versus its 5.4% annualized growth for the past five years. This projection is underwhelming and suggests its products and services will see some demand headwinds.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Oshkosh’s margin dropped by 9.9 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its relatively low cash conversion. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. Oshkosh’s free cash flow margin for the trailing 12 months was 2.8%.
Final Judgment
Oshkosh isn’t a terrible business, but it doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 10.3× forward P/E (or $111.54 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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