Oshkosh

A China Based Cloud Play in the Fertilizer Vertical with a Social Networking Twist
Jake Rosser June 16, 2011

Coho Capital
‡ Coho Capital is a long-only investment partnership premised upon Warren Buffet¶s original partnership. ‡ We are a go anywhere Fund with a wide investment mandate to capture value wherever it may be found. ‡ We adhere to a concentrated style and typically hold between 25-30 intensely researched positions. ‡ We manage risk through a deep understanding in what we own, avoiding leverage and insisting on companies with positive free cash flow and strong balance sheets. ‡ Portfolio construction parameters focus on minimizing industry correlations and diversifying holdings across geographies and market cap sizes. ‡ We eat our own cooking. All of the Portfolio Manager¶s investable assets outside of real estate are invested in the Fund.

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Investment Approach
‡ Coho Capital invests in easily understood business with positive free cash flow and improving financial metrics. ‡ Looking for wide discounts to intrinsic value with downside protected by assets, stable free cash flow generation or the quality of the business franchise. ‡ Seek to benefit from time arbitrage with a typical time horizon of two to three years. ‡ Investment candidates tend to be experiencing temporary duress and are typically out of favor or ignored.

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What¶s Out of Favor Now?

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My Son Would Love This Company

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Oshkosh (OSK) Operates in Four Segments:

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Oshkosh, By Gosh it¶s Cheap
Market value $2.36 Billion, Enterprise value of $3.09 billion EV/EBITDA ± 3.1 2010 FCF - $570 Million, FCF yield of 24% 2011 P/E ± 7.7 compared to an average annual P/E of 12.0 P/S ± 0.30 Current enterprise value of $3.09 billion is below the $3.2 billion Oshkosh paid to acquire JLG in 2006. ‡ Earnings yield of 26.7% and a return on capital of 75.9% making it the 5th highest rated stock in the market according to Joel Greenblatt¶s Magic Formula. ‡ ‡ ‡ ‡ ‡ ‡

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Why is it Cheap?
‡ Company concerns:
± Acquisition of lift maker, JLG, at the peak of the market cycle led to a perilously high debt load and an erosion of trust in management¶s capital allocation abilities. ± Transition from production of high volume, high margin Mine Resistant Ambush Protected (MRAP) vehicles to low margin low volume Family of Medium Tactical Vehicles (FMTV) has negatively impacted recent results: ‡ Q2 revenue and operating income declined by 39.1% and 73.2% respectively.

‡ Macro concerns:
± Defense and Fire and Emergency are reliant upon government spending. ± Commercial and Access segments services the construction market which remains anemic.

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What is the Market Missing?
‡ Myopic focus on short-term results overstates the threat to future defense revenue streams. ‡ The cessation of Oshkosh¶s lucrative MRAP contract made for a dramatic comparison on year over year quarterly numbers. ‡ Demand for parts and services on MRAP vehicles will lead to high margin recurring revenues streams. ‡ Q2 results reflected the start-up costs associated with production of the new FMTV but do not yet include revenue from the contract. ‡ Were results really that bad? Even with these headwinds, EPS came in at $0.74, equivalent to $2.96 annualized or a 8.8 P/E.

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What is The Market Missing?
‡ Strong balance sheet with $637 million in net debt
± Reduced debt by $736 million in 2010.

‡ Additional deleveraging should provide a tailwind to future EPS.
± Reduced debt by nearly $2 billion over the last three years. ± With $550 million in FCF in 2010, OSK could pay off its remaining debt in 1.3 years. ± Reduction of outstanding debt would result in additional earnings accretion of $0.95 in annual EPS ± Cash has grown from $339 million at the end of September to $417 million at the end of April.

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Oshkosh has thrived through multiple cycles
‡ Founded in 1917. ‡ #1 in each of its market segments with the exception of defense, which is hard to measure. ‡ Over 14 years, revenues grew every year except 2. ‡ Earnings compounded by 22% a year over 10 years ‡ Cash flow grew by 20% a year over 10 years.

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Valuation scenarios
‡ Averaged a PE ratio of 12.0 over the past ten years. ‡ A reversion to its historical P/E ratio would result in a return of 64% from its current forward P/E of 7.3. ‡ Earn $5.50 per share in FCF next year. ‡ A reasonable 10x multiple on FCF would result in a share price of $55.50 or a return of 114% from current levels.

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What Could Go Wrong?
‡ Construction spending could remain constrained. ‡ Withdrawal of Federal stimulus could crimp state budgets further. ‡ Municipal budgets remain constrained due to reliance on property taxes. ‡ Sales to the US government account for 72% of total revenues.

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Regulatory risks are unpredictable

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What Could Go Right?
‡ State tax revenues grew 9.1% in Q1, the 5th straight quarter of growth and fastest rate in 5 years.
± The majority of this growth stems from income and sales tax collections rather than tax increases. ± ³If the current pace of revenue growth holds it could shave projected budge gaps by roughly $20 billion.´ ± Goldman Sachs

‡ Spending by municipalities for emergency preparedness and homeland security is not completely discretionary. ‡ Follow-on Defense orders ‡ Cost reduction initiatives could mitigate the impact of lower defense revenues. ‡ Access equipment orders increased 73% last quarter and backlog tripled to $596 million.
± New manufacturing facility in Tianjin, should aid in expansion of Asian revenues.

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Margin of Safety

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Conclusion
‡ Classic Dhando stock ± high uncertainty but little downside ‡ Generous margin of safety
± ³If nobody owns something, demand for it (and thus the price) can only go up and by going from taboo, to even just tolerated, it can perform quite well´ ± Howard Marks

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Oshkosh
A China Based Cloud Play in the Fertilizer Vertical with a Social Networking Twist
Jake Rosser June 16, 2011

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