Oshkosh Truck: From Lake Winnebago to Iraq

Ford's future keeps getting darker. Maybe General Motors might rescue it in a merger, but that would have all the appeal of a combination of two declining newspapers. The Germans haven't helped Chrysler much. American workers build millions of excellent vehicles for Toyota, Honda and Nissan, but these Japanese manufacturers remain bent on driving Ford and GM off the road.

This doesn't mean you can't turn a buck investing in American wheels. Oshkosh Truck (symbol OSK) is a midsize firm from, naturally, Oshkosh, Wis., that was founded in 1917. Its trash haulers, concrete mixers, wreckers and military trucks help the company deliver record sales and profits year after year. Unlike its beleaguered cousins in Detroit, Oshkosh isn't terribly cyclical. It hasn't had a calendar-year loss since 1996, and earnings per share have risen every year since then. It is also a frequent dividend-raiser.

As for the stock, it has been flat-out sensational. In 1996, before the company made a series of mostly successful acquisitions, the shares traded for less than $2 (adjusted for splits). Today, it's at $49, after being as high as $65 earlier this summer.

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Oshkosh is obviously proud of its stock's performance. The investor relations area of its Web site (www.oshkoshtruckcorporation.com) contains a tool that lets you determine the stock's return from any day in the past to the present. For example, since October 1997, the month when Robert Bohn took over as chief executive officer, Oshkosh shares have gained 2,443%. Standard Poor's 500-stock index climbed 40% (excluding dividends) over that period.

What's more, despite annualized earnings growth of 25% over the past ten years and an excellent balance sheet, Oshkosh today sells at only 17 times estimated 2006 earnings and 14 times next year's forecasts. Talk about growth at a reasonable price.

Here's an audacious comparison. Since 1996, Oshkosh's stock-price chart closely tracks that of Genentech. The companies' returns on shareholders equity (a measure of profitability) are comparable. Yet shares of Genentech (symbol DNA) trade at 39 times this year's average profit estimate, even though the biotech star's growth rate is not dramatically higher than that of the truck builder from the shores of Lake Winnebago.

So do we conclude that at 25% below its 52-week and five-year highs, Oshkosh Truck is a screaming buy? Or is the Oshkosh discount deceptive, available only because there are potholes in the road ahead?

The answer may lie with what happens in Iraq. Yes, Iraq, because it's the booming sales to Uncle Sam and particularly to the armed forces that appear to be the key factors prolonging Oshkosh's winning streak.

In the first nine months of fiscal 2006, military sales rose 40%, while growth in fire and emergency and commercial sales were more tepid. The longer the war in Iraq lasts, or more accurately, the longer the U.S. military remains deployed there in large numbers, the better business is for Oshkosh, which makes heavy troop trucks and heavy equipment transporters. To quote the company's recent quarterly filing with the Securities and Exchange Commission, "the duration and intensity of Operation Iraqi Freedom ... among other things are expected to increase the Defense Department's needs for the company's tactical trucks and for the remanufacturing of trucks damaged in the conflict."

Even allowing for a continuation of strong sales to the military, Oshkosh is forecasting substantially slower growth next year. It sees full-year 2007 earnings growth of 11% to 17%, down from 25% gains in 2006 over 2005, and for sales growth to possibly fall into the single digits.

All of this suggests caution. Oshkosh isn't going to go the way of Ford and General Motors or turn into a plodding, inconsistent grower whose shares rise and fall like a yo-yo. But when the market knocks 25% off the value of a superior stock during a strong rally, it's telling you to watch for some potholes.