For some companies, predictability is as important as the ability to innovate – especially when the customer will always need to buy.
As the global financial crisis of 2007–08 translated into a global recession, it hit the finances, not simply of the private sector but also of central and local government. Inevitably, many new projects were cancelled, but the search for cost savings meant that even important financial commitments were deferred.
In the US, municipalities and small businesses alike cut back on some of the more obvious regular costs quite quickly. According to Jim Henderson of Aristotle Asset Management, replacement rates quickly fell for buses, fire engines and police cars alike as lower tax revenues forced cost savings on administrations at all levels of government.
“After the financial crisis, US municipalities had no money and revenues therefore declined for companies that supply them,” says Henderson. “Local governments and businesses couldn’t afford to replace their stock.”
Municipalities face all kinds of ongoing costs in order to maintain service levels, including repairs and upgrades to their fleets of emergency vehicles. For companies like OshKosh, which manufactures a range of specialist vehicles such as cement mixer trucks, fire engines, cranes and military personnel carriers, this threatened their business model.
However, while such upgrades were postponed in the wake of the financial crisis, Henderson believes they could not be deferred indefinitely.
“Our theory is that you can delay purchases but not omit them in this area,” says Henderson. “You are still going to need fire trucks and cement mixers, even in a downturn. OshKosh [was similarly sanguine about the] reduced demand for military hardware post the Iraq war, again in the knowledge that inventories would have to be built up. The company subsequently won a huge defence contract.”
In 2008, Aristotle added OshKosh to the St. James’s Place North American fund, convinced that the outlook remained positive despite the broader economic downturn.
“OshKosh has leading market share in nearly every one of its business segments, a diversified customer base and is operating in a market that has high barriers to entry,” says Henderson. “It is hard to compete with such a specialised business – fire engines, cement mixers and military vehicles cannot be easily imitated.”
Part of Aristotle’s analysis process involves working out a company’s prospects “on a normalised basis”. In other words, Henderson and his colleagues want to compute how the company is likely to perform in typical market conditions, rather than allowing their judgment to be overly influenced by the business outlook at the time. Inevitably, such an approach only pays off in the context of a long-term investment strategy. In the case of OshKosh, Henderson believes the company remains undervalued given its potential.
“There are various reasons we think OshKosh will achieve its full value over our time horizon,” says Henderson. “Cost optimisation efforts will result in higher margins, the company is gaining market share across its different business segments, and its focus on aerial platforms [such as cherry pickers, used in construction] has grown as global safety standards increase.”
This gives the company a double edge. Not only are its products high-quality enough to ensure continued regular orders from those who have to update existing stock, not least municipalities, but the company is also exploiting new areas and new technologies with great effect.
“There is a potential kicker on the military side, too,” says Henderson. “OshKosh is bidding to replace the Humvee with its Joint Light Tactical Vehicle. Growth can come from a number of different quarters.”
Aristotle Asset Management is a fund manager for St. James’s Place. The opinions expressed are those of Jim Henderson of Aristotle Asset Management and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. Full advice should be taken to evaluate the risks, consequences and suitability of any prospective fund or investment. The views are not necessarily shared by St. James’s Place Wealth Management.
The value of an investment with St. James’s Place may fall as well as rise. You may get back less than you invested. Please be aware that past performance is not indicative of future performance