Oshkosh has had an impressive run over the past six months as its shares have beaten the S&P 500 by 19.6%. The stock now trades at $130, marking a 38.4% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Oshkosh, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Oshkosh Not Exciting?
Despite the momentum, we're cautious about Oshkosh. Here are three reasons you should be careful with OSK and a stock we'd rather own.
1. Weak Backlog Growth Points to Soft Demand
Investors interested in Heavy Transportation Equipment companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Oshkosh’s future revenue streams.
Oshkosh’s backlog came in at $14.23 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 1.3%. This performance was underwhelming and suggests that increasing competition is causing challenges in winning new orders. 
2. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.
Oshkosh has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 16.4% gross margin over the last five years. Said differently, Oshkosh had to pay a chunky $83.61 to its suppliers for every $100 in revenue. 
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Oshkosh’s margin dropped by 7.3 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its relatively low cash conversion. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. Oshkosh’s free cash flow margin for the trailing 12 months was 5.7%.
Final Judgment
Oshkosh isn’t a terrible business, but it isn’t one of our picks. With its shares outperforming the market lately, the stock trades at 11.6× forward P/E (or $130 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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