Net Long OSK

I just finished reading the 10-K for OSK, which was released in November 2012.  OSK first came on my radar when Icahn made a tender offer (that he later withdrew) for $32.50.  

The company has 4 main sectors, Access Equipment, Defense, Fire & Emergency, and Commercial.  Only the Defense sector showed any decline this past year.  Future guidance was for the same, growth in 3 sectors with declines in the defense sector (for an overall decline in revenues). 

In 2012, total capitalization to debt decreased from 40% to 35%.  Management feels that 35% is the right debt profile for the company.  With the debt profile reaching its goal, the company can now use that cash to grow their business as well as give more back to shareholders.  The company did modest buybacks in 2012 but could see larger buybacks this year.  Another catalyst could be a reinitation of some sort of dividend (OSK last paid a dividend in 2009).  

I am more interested in net debt and noticed that cash equivalents also increased.  Net debt is also down to approximately 0.5B.  Another positive (for stock holders) is that long term benefits are now being reduced for both executives and retirees (see page 3 of the 10-K).   

Another benefit, interest costs are dramatically lower because total debt has declined.  OSK was also able to refinance its short term debt facilities at lower rates.  Down the road, their senior notes are  redeemable in 2014 (at a premium).  Interest rate on this debt is 8%+. 

While there are positives, there are plenty of negatives.  Gross margins declined YoY and coupled with higher SG&A, operating margin continued to deteriorate.  Offsetting some of the deterioration is lower overall interest costs, but that alone is not enough.  Some of the bump in SG&A can be attributed to lowering retirement costs (freezing some executive plans as well as some employee plans), which I think in the short term is okay.

Even though there are a lot of positives, the street has realized it (before I could finish my review) and the stock has run up from 26-28 to current 32.80.  I think there is value up to 36 and possibly to 48-60 (if management is able to achieve all of its objectives).

At current levels, there is only 10% upside ($36-$32.80 or $3.20/$32.80).  Instead of being outright long OSK, there is a better trade.  I sold cash covered puts at $30 for February for $0.42.

The annualized return (if I could do this every month) is closer to 14% ($0.42 / 36 days x 365 days / $30) while also giving me $2.80 (or $3.32 with the premium) of downside protection at expiration.  I believe this trade to be superior vs being outright long OSK. 

If OSK goes to $36 tomorrow, of course I will not be happy.  Most of the time, however, I am able to do this type of trade for a few months while the stock hangs around at the same level (or goes down).  In my next post, I am going to show an example of real trades I did with another stock in 2012.