Oshkosh’s 34.4% return over the past six months has outpaced the S&P 500 by 14.6%, and its stock price has climbed to $120.42 per share. This performance may have investors wondering how to approach the situation.

Is now the time to buy Oshkosh, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Is Oshkosh Not Exciting?

Despite the momentum, we're cautious about Oshkosh. Here are three reasons why OSK doesn't excite us and a stock we'd rather own.

1. Backlog Declines as Orders Drop

We can better understand Heavy Transportation Equipment companies by analyzing their backlog. 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 $13.69 billion in the latest quarter, and it averaged 1.9% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation.

2. Low Gross Margin Reveals Weak Structural Profitability

For industrials businesses, cost of sales is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics in the short term and a company’s purchasing power and scale over the long term.

Oshkosh has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 16.5% gross margin over the last five years. That means Oshkosh paid its suppliers a lot of money ($83.50 for every $100 in revenue) to run its business.

3. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Oshkosh’s margin dropped by 7 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 7.5%.

Final Judgment

Oshkosh isn’t a terrible business, but it doesn’t pass our bar. With its shares outperforming the market lately, the stock trades at 10.4× forward P/E (or $120.42 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward the most dominant software business in the world.

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