Icahn has been a large shareholder of the equipment maker Oshkosh since 2011 and has been in a heated battle to have new members elected to the board. This would be just one stepping stone to what many believe is Icahn’s plan to break the company into a defense and a construction equipment company. Shortly after Icahn took a 10% stake in Oshkosh last year, he took a noticeable stake in Navistar International Corp (NYSE:NAV). The idea is that with enough pressure, Icahn could convince the two companies to merge their defense units.
Icahn had been unsuccessful in electing six board candidates to the board earlier this year and upped his efforts by offering $32.50 per share – a 20% premium at the time – for the over 90% of Oshkosh shares he did not already own in an effort to get his candidates on the board. Icahn has called for a more aggressive growth strategy, believing that management has underachieved that implementing new initiatives at the company.
Bank of America analysts and Oshkosh’s management rebutted Icahn’s offer as undervaluing the equipment company, though, so there were mixed feelings to say the least. We believe that potential Oshkosh investors might fall into a so-called value trap, where the stock’s valuation looks attractive, but there are bearish fundamental issues at play. The industrial company appears to trade below many of its major peers at 10x earnings, but we believe this sub-industry average P/E is warranted.
Icahn does not always succeed, as exhibited by exits from Clorox and Commercial Metals after unsuccessful bid attempts. Since Icahn started removing himself from these companies they have both underperformed the broader market, as measured by the S&P 500. Clorox is up only 9% versus the S&P that is up 17%, and Commercial Metals is down 9% compared to the S&P that is up 9%.
There still appears to be significant risk in Oshkosh’s defense segment and the equipment company will now have to rely heavily on its commercial segment. Revenues are expected to be down 7% in 2013 due to a sharp decline in defense demand. Oshkosh’s recently quarterly results showed that the vehicle manufacturer beat estimates of $0.47 by posting $0.71; even so, backlog was down heavily, 38% year over year and 13% quarter over quarter. This downfall in backlog was mainly driven by weakness in the access equipment business, which was expected to carry the company, down 50% year over year and 51% quarter over quarter.
Although some analysts and management still attach an undervalued status on Oshkosh based on a sum-of-the-parts valuation, the reality remains that to effectively break up the company there would need to be a buyer. There are limited parties interested who could get enough synergistic value to pay the premium that management is expecting. We believe that although the Oshkosh-Navistar segment merger might not come to fruition, Navistar could serve as a better standalone investment.
