Well-known investor Carl Icahn has been agitating for various changes at specialty commercial and defense truck manufacturer Oshkosh (NYSE:OSK) for some time now. On October 10, 2012 Mr. Icahn ratcheted things up a notch - making an offer to the company's board to take the company private for $32.50 per share in cash. Should investors push the board to cash out, or should they hope that the board rebuffs Icahn and continues on as an independent publicly-traded company?

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.

The Bid
Word came out Thursday that billionaire investor Carl Icahn has approached Oshkosh with a nearly $3 billion all-cash bid that values the company at about $32.50 per share. Coincidentally, Icahn is also pushing ahead with a plan to nominate a slate of his own directors.

So far Oshkosh management has said essentially nothing; the company acknowledged the bid, advised shareholders to take no action, and indicated that a response would be forthcoming within 10 business days. It is worth noting that Icahn already owns a bit more than 9% of the shares of Oshkosh.

SEE: Analyzing An Acquisition Announcement

Are Oshkosh's Problems Cyclical or Structural?
Icahn seemingly doesn't get involved in companies where he's happy with management (or at least his involvement is much quieter), and Oshkosh is no exception in that regard. In particular, Icahn has been dissatisfied with the pace and scale of restructuring efforts at Oshkosh, as the company attempts to cope with major declines in the defense business and ongoing sluggishness in its commercial, fire/rescue and construction operations. It's also worth noting that it wasn't so long ago that Icahn was openly calling for a merger between Oshkosh and Navistar (NYSE:NAV).

As generally seems to be the case, Icahn has at least something of a point. Despite a strong position in tactical trucks and the simultaneous wars in Iraq and Afghanistan, Oshkosh has struggled to replicate the margins it produced during the housing boom of the mid-2000s. Likewise, returns on capital and free cash flow generation have turned wobbly and volatile, and the stock is well below its 2007 highs.

Certainly Oshkosh has had some issues. The company paid too much for JLG (aerial work platforms) and bought the company at almost the absolute wrong time; profits are still just a fraction of the prior peak. At the same time, state and municipal budget issues have hurt the fire/rescue businesses, and the lack of lower-priced offerings has hampered emerging market penetration. In addition, leadership relative to companies like Terex (NYSE:TEX), Manitowoc (NYSE:MTW), Miller (NYSE:MLR), Dover (NYSE:DOV) and Navistar in its non-defense businesses just hasn't translated into notably superior performance.

MOVE or Move On?
Management has not exactly been ignoring the situation. The company has launched its MOVE strategy, which is designed to optimize the company's capital structure and cost efficiency. It's not always easy to show significant cost improvements during cyclical lulls, but stripping costs out of the manufacturing process ahead of improving volumes in construction at least makes sense.

During its analyst day, management laid out plans that should see actions taken in FY2012 produce about 75 basis points of operating margin improvement in 2013, with even greater improvements in 2014 and 2015. In particular, management is targeting a doubling of margins in access equipment, mid single-digit margins in fire/rescue, and more than a doubling of commercial vehicle margins.

If the construction market improves, and the company doesn't lose meaningful share to the likes of Terex or Dover, this should be a powerful one-two punch. At the same time, management seems unwilling to just throw in the towel on the defense business. U.S. defense spending is likely to decline (and decline sharply if the "fiscal cliff" cuts kick in), but there's still debate as to how the remaining money will be spent. What's more, while the U.S. government is far and away the largest buyer of tactical trucks, it's not the only potential customer for Oshkosh.

SEE: 5 Must-Have Metrics For Value Investors

The Bottom Line
Even with the aforementioned improvements, I think Oshkosh will have to work hard to basically tread water for the next few years as improvements in non-defense businesses offset declines in defense-related volumes and profits. Nevertheless, I do believe that the company can produce mid-single digit revenue growth and mid-single digit free cash flow margin; doing so translates into about 6% free cash flow growth and a fair value in the mid-$30s.

As for the Icahn offer, I think it really comes down to a shareholder's appetite for risk. I think management has a better-than-average shot of hitting those targets and delivering free cash flow growth of 5-8% over the next decade, but there's still a possibility that it will fail (and/or that the construction/commercial vehicle recovery is weaker and more protracted). By comparison, while Icahn's offer likely leaves a couple of dollars on the table, it is a basically risk-free opportunity to cash out at a price that's at least in the realm of fair.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!