Mega-trucks may load up mega-profits

By Jon Markman

Nothing quite says America like the freedom to own a big freakin' truck.

Not just a suburban assault vehicle with a DVD player in the back and a mommy behind the wheel, or a six-wheeled, four-door bruiser with a hemi engine. I'm talking a massive, sun-blocking, road-cracking, gas-guzzling whale that thunders like a thousand storms and leaves no doubt that someone very loud is coming, so watch out.

Over the next year, as gas prices ebb and interest rates subside, gigantic American-made mega-trucks are likely to regain their bold and brazen edge on roads the world over, pushing the fortunes of their manufacturers higher along the way.

Most of the big truck makers have seen their shares hammered over the past two years as investors have fretted over conflicting directions for the global economy. But now that it's apparent that a slowdown is coming and truck makers' earnings are within earshot of the bottom, it may be time to climb aboard these massive industrial icons.

A buy, by gosh

After all, we will probably need some brawn next year. The bull market that started in 2002 is heading into its fifth year in 2007. Birinyi Associates says that fifth-year returns have been awesome historically, averaging S&P 500 gains of 22.6%. Other positives for 2007: The third year of second presidential terms have averaged 10.8%; Federal Reserve interest-rate cut cycles have averaged 18.3% per year; and, strangely, periods of decelerating profit growth, which we're likely to see in 2007, have averaged 25.8%.

One of the great U.S. truck makers now on the skids, indeed, is my top pick for 2007 among all middle-sized companies. It's Oshkosh Truck (OSK, news, msgs), based in the industrial heartland of Wisconsin. The market has rarely afforded investors such a prime opportunity to buy into Oshkosh at a decent price, as the company has been rewarded for churning out great trucks and operating results for more than a decade. Shares are up 3,000% since 1996, about 30 times better than the broad market. Results in the past have been so good, in fact, that when the company beat consensus estimates only by a penny in the third quarter of this year, rather than by its usual 4 or 5 cents, the market took shares down 10%.

Oshkosh focuses on making rock-solid, bulletproof trucks for niche markets. Cement trucks. Dump trucks. Garbage trucks. Firetrucks. Troop carriers. The company raked in $205 million in profit over the past 12 months on $3.4 billion in sales, averaging 32% growth over the past five years alone.

The Pentagon and foreign defense departments provide 40% of the company's revenues at this time, as heavy tactical trucks are critical to modern warfare. A key product is the Heavy Expanded Mobility Tactical Truck, or HEMTT -- affectionately dubbed the "Dragon Wagon" by troops. Although not as famous as California Gov. Schwarzenegger's Humvee, the 10-wheeled transporter of food, fuel and ammo is renowned for its awesome off-road mobility.

In all segments, Oshkosh engineers its trucks for harsh treatment in extreme environments. But the company is by no means all brawn and no brains, as innovation plays a big role. The Dragon Wagon comes in a diesel-electric hybrid version that gets 20% better fuel economy than the original. Think of it as a Toyota Prius that can carry a 13-ton payload and plow through six feet of water. The company's fire trucks are pretty high-tech too, and offer the industry's first side-curtain air bag. You know, in case the driver gets T-boned by a tank.

A down-tick too far

Despite evident strengths, shares of Oshkosh have been on a slide recently, down 30% since May. In addition to the earnings-expectations miss, a reason for the sell-off was the announcement of the acquisition of JLG Industries (JLG, news, msgs), the top maker of aerial work platforms.

I think the selling went too far, giving us a great entry for a position ahead of the new year. Even if you're worried about growth in 2007, Oshkosh has a history of beating its own guidance in all conditions. Over the past eight quarters on average, results have beat expectations by 27%. The one miss this quarter was a result of 4 cents in one-time charge-offs. In the bear-market years at the start of the decade, Oshkosh didn't miss a turn, rising 51% in 2000, 12% in 2001 and 27% in 2002 before jumping 67% in 2003.

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