Does Oshkosh Corporation (NYSE: OSK) P/E Multiple Signal A Buying Opportunity?

in VALUATION MULTIPLES by

Oshkosh Corporation (NYSE: OSK), an industrials business with a market capitalization of $5.2 billion, currently trades at a P/E multiple of 13.3x which is below the sector’s median multiple of 22.1x. Although this makes OSK look attractive, investors may change their mind after reviewing the assumptions behind the P/E ratio. In the post below, I explain how to apply P/E multiples and what to watch out for.


How To Utilize Oshkosh’s PE Multiples

A multiples valuation, also known as a comparable companies analysis, determines the value of a subject company by benchmarking the subject’s financial performance against companies deemed to be similar. We can then determine if a company is undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation multiples.

P/E Ratio is a valuation metric that indicates the multiple of earnings investors are willing to pay for one share of a company:

P/E Ratio = Stock Price ÷ Earnings Per Share

The P/E ratio by itself is not very helpful at all. It is only useful when comparing it to other companies that are considered similar to the subject company. The basic idea is that companies with similar characteristics should trade at similar multiples, all other things being equal. Therefore, we can come to a conclusion about the stock if the ratios are different. In the chart below, I compare Oshkosh’s P/E ratio to its peer group that includes Terex Corporation(NYSE: TEX), AGCO Corporation (NYSE: AGCO), Navistar International Corporation (NYSE: NAV) and Manitowoc Company, Inc. (The) (NYSE: MTW).

OSK P/E Ratio vs Peers Chartsource: finbox.io Benchmarks: P/E Multiples

Since Oshkosh’s P/E ratio of 13.3x is lower than the median of its peers (24.0x), it means that investors are paying less than they should for each dollar of OSK’s earnings. As such, our analysis shows that OSK represents an undervalued stock. Furthermore, finbox.io’s P/E Ratio Model calculates a fair value of approximately $104.50 per share which implies roughly 48.5% upside.

OSK P/E Valuation Calculation

I selected a fair multiple of 19.8x in my analysis by averaging Oshkosh’s current P/E ratio with its peer group.


The P/E Ratio’s Flaws

While this approach typically provides a reasonable valuation range, it is important to understand that our conclusion rests on some important assumptions. The first being that the selected peer group actually contains companies that truly are similar to Oshkosh. The second important assumption is that the selected peer group stocks are being fairly valued by the market.

If the assumptions above do not hold to be true, then the difference in P/E ratios could be due to a variety of factors. For example, if you accidentally compare Oshkosh with higher growth companies, then its P/E multiple would naturally be lower than its peers since investors reward high growth stocks with a higher price.

OSK Net Income Growth and Margins vs Peers Tablesource: P/E model

On the other hand, if the second assumption does not hold true, Oshkosh’s lower multiple may be because our selected comparable companies are being overvalued by the market.


What To Do Next

As a current investor, you may have already conducted fundamental analysis on the company and its stock so its current undervaluation could signal a potential buying opportunity to increase your position in OSK. But keep in mind the P/E ratio’s potential flaws when applying this valuation approach. It is important to note that there are a variety of other fundamental factors that I have not taken into consideration in this article. I highly recommend that you continue your research on Oshkosh by taking a look at the following:

Valuation Metrics: how much upside do shares of Oshkosh have based on the Ben Graham Formula? Take a look at our Ben Graham Formula data explorer which also compares the company’s upside to its peers.

Risk Metrics: what is Oshkosh’s Altman Z score? It’s a famous formula used to predict the probability that a firm will go into bankruptcy within two years. View the company’s Altman Z score here.

Efficiency Metrics: how much free cash flow does Oshkosh generate as a percentage of total sales? Has it been increasing or decreasing over time? Review the firm’s free cash flow margin here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Expertise: financial modeling, mergers & acquisitions. Andy is also a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to do investment research. Andy’s background is in investment banking where he led the analysis on over 50 board advisory engagements involving mergers and acquisitions, fairness opinions and solvency opinions. Some of his board advisory highlights: - Sears Holdings Corp.’s $620 mm spin-off via rights offering of Sears Outlet, Hometown Stores and Sears Hardware Stores. - Cerberus Capital Management’s $3.3 bn acquisition of SUPERVALU Inc.’s New Albertsons, Inc. assets. Andy can be reached at andy@finbox.io or at +1 (516) 778-6257.

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