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Investors Can Take a Ride on a Harley

March 27, 2014 | About:
Victor Selva

Victor Selva

9 followers

Harley-Davidson Inc. (HOG) produces and sells heavyweight motorcycles, as well as offers motorcycle parts, accessories, and related services. It operates in two segments, Motorcycles and Related Products (Motorcycles), and Financial Services (HDFS).

So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity when estimated revenues from sales of motorcycles and related products rose 6% in 2013.

Strong Competition

Harley-Davidson boasts a market share of about 55% in the U.S. heavyweight segment, and plans to compete with brands such as Honda (HMC), Yamaha and Suzuki in the lightweight division. Although lightweight motorcycles tend to have lower margins due to cheaper prices, cost effective measures should somewhat offset that effect.

Cost-Effective Strategies

The company has made restructuring efforts with good results. It realized savings of $280 million in 2012 and $310 million in 2013 from these activities, and it plans to have annual savings of approximately $320 million from 2014 onwards. The firm plans to utilize the low labor costs and other cost-cutting operational advantages offered by large scale manufacturing in India.

Dividend Policy

Looking at the financials, the company has a strong balance sheet: good cash that allows it to reward current shareholders through dividends. Dividend-payment history affirms its commitment to maximize shareholder wealth. The company raised its quarterly dividend by 31% to $0.275 per share from $0.14. Furthermore, Harley-Davidson spent $455.6 million to repurchase 7.7 million shares in 2013 and still have authorization to buy back 8.6 million shares at the end of the year.

Analyst Recommendation

The firm is currently Zacks Rank # 3 – Hold, and it also has a longer-term recommendation of “Neutral.” For investors looking for a Zacks Rank # 1 – Strong Buy, Tesla Motors Inc. (TSLA) could be an option.

P/E, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 20.3x, trading at a premium compared to the mean industry. Earnings per share (EPS) increased by 9.7% in the most recent quarter compared to the same quarter a year ago, to $0.34 per share for the fourth quarter of 2013, beating the Zacks Consensus Estimate of $0.32. We include in the next graph the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance makes the stock appealing with an upward trend over the last five years.

1395856017485.png

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased by 0.01% when compared to the same quarter one year prior. Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

HOG

Harley-Davidson

24.39

TSLA

Tesla Motors

-11.9

F

Ford Motor Co.

27.12

PCAR

PACCAR Inc.

17.66

As we can see, the firm has a higher ROE than Tesla Motors and Paccar Inc. (PCAR), but far less than the one from Ford Motor Co. (F).

Final Comment

As outlined in this article, Harley-Davidson´s efficiencies to compete in new divisions, along with its earnings recovery and its dividend policy makes me feel bullish about the company.

In 2013, Harley-Davidson shipped 260,471 motorcycles, compared from 249,849 units in 2012, 235,188 in 2011, and 210,494 in 2010, but still below the 303,479 of 2008. In 2014, Harley-Davidson expects shipment of 279,000-284,000 motorcycles, up 7% to 9% over 2013.

According to Yahoo! Finance, the estimated one-year target share price is $71.58, so if you buy shares at current market price ($66.83), your return from price appreciation would be 7.1%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of 27.5 cents per share each quarter, totalizing $1.1 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 1.6%. So the total expected return for investing in Harley is 8.7%.

Its closed price level was 25.91% higher from its price level of one year ago. In looking at the bigger picture, I would recommend investors to add Harley to their long term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Steven Cohen (Trades, Portfolio) has taken a long position in it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


Rating: 4.3/5 (3 votes)

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