Wednesday, August 05, 2009

Oshkosh (NYSE:OSK): Downgraded to Hold at Keybanc

Keybanc is downgrading Oshkosh (NYSE:OSK) to Hold from Buy as it has now exceeded firm's former $30 price target.

In Keybanc's view, the earnings prospects for FY10 from its recent MRAP – ATV contract win (the crux of their upgrade on July 6) appears to be discounted in the current share price. While they expect there could be modestadditional upside in the shares, and remain encouraged by OSK's additional MRAP prospects including a follow-on order for potentially 1,300 vehicles (bringing the total program quantity to 5,244 vehicles) in addition to numerous parts and service contracts that could amount to hundreds of millions of revenue potential, they believe the majority of the "easy money" has been captured. Since their upgrade on July 6, OSK shares have appreciated 61.7% vs. the S&P 500's increase of 11.6%. This outperformance was driven by the positive earnings step function in FY10 (firm is modeling $3.25 vs. consensus of $2.48 from their estimate of a loss per share of $0.54 in FY09) and the potential to not only bridge the earnings gap to when fundamentals begin to improve in its challenged Access Equipment & Commercial segments, but to also improve its liquidity position.

While they still expect these drivers to materialize, Keybanc believes three primary factors could limit the near-term upside in the shares:

- First, the continuation of future positive news flow is likely to abate. They believe OSK will be awarded the additional 1,300 vehicles and consensus estimates for FY10 ($2.61) will increase; however, the incremental news of unexpected awards (FMTV, Australian Land 121) is uncertain.

- Second, current valuation fairly reflects OSK's future prospects and normalized earnings.

- Third, in their view, the likelihood of an equity offering is becoming a higher probability given the run up in the shares coupled with the lack of a defense performance payment announcement thus far. While an equity offering would pose a near-term risk to the existing share price, depending on pricing level, the firm anticipates being supportive of a deal as a result of the prospect of an improved capital structure.

As a result of the aforementioned factors, they are downgrading their rating on the shares of OSK to HOLD from BUY.

Notablecalls: I think this downgrade will work as Keybanc has done a good job covering the stock lately. Some of their clients are sitting on hefty gains and will be looking to sell in the n-t. So you either short now or fade the upcoming news of the 1,300 M-ATV order.

I'm guessing 4-5% downside in OSK today.

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