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Expensive Bike, Cheap Stock?

June 18, 2005

Expensive Bike, Cheap Stock?


Harley-Davidson (HDI) is a name popular not only in America's Main Street, but also on the Wall Street. It is popular as an investment because of its simple business model, well-known brand name, strong profitability, and steady growth. Its stock recently dropped from 60 to 40s on forecast of slower growth. The company guided a growth rate of mid-single-digit for the next year, down from the historical high-single-digit to teens. Is it a good value? Let's be an informative shopper:
Harley-Davidson (HDI): Market Capitalization $14 Billion (6/16)
Fiscal Year 2004 2003 2002 2001 2000
Revenue ($Million) 5,015 4,624 4,091 3,407 2,943
Net Income ($Million) 890 761 580 438 347
Depreciation ($Million) 214 197 176
Capex ($Million) 214 227 324
Owner's Earning ($Million) 890 730 432
Capex ($Million) 214 227 324
# Of Shares (Million) 297 304 305 306 307
Shareholders' Equity ($Million) 3,218 2,958 2,233 1,756 1,406
Long Term Finance Debt ($Million) 800 670 380 380 355
Market Share of Heavyweight Motocycle
    Worldwide 33.0% 32.8% 30.3%
    U.S. 50.2% 50.3% 48.2% 45.7% 46.8%
    Europe 9.0% 9.1% 7.7%
    Japan/Australia 26.8% 27.5% 22.5%
Unit Shipment (Thousand) 327 301 275
The continued growth of HDI relies on the following factors:
  1. Growth in market share in existing markets. Competition is fierce both domestically and internationally. Based on historical market share numbers, it is highly uncertain whether HDI can steadily improve market share at a significant pace.
  2. Population growth of HDI's main customer base. According to HDI's annual report, the average U.S. purchaser of a new Harley-Davidson motorcycle is a married male in his mid-forties (over two-thirds of purchasers are between the ages of 35 and 54), with a median household income of approximately $81,400. Just based on my casual observation, I'd say most of them are caucasian. What is the population growth in this segment over the next decade? Probably not high, given that the baby boom generation has mostly passed this stage of their lives.
  3. Growth in new markets, such as China, India. It is very uncertain how much of the population in these new markets will pay the price of a car for a motocycle mainly for its prestige instead of practicality. HDI's international sales accounts for 18%, 18% and 17% of the total motorcycle sales in 2004, 2003, and 2002, reflecting the fact its international growth has been in line with its domestic growth.
  4. Continued devaluation of U.S. dollar.
Based on these factors it is safe to assume a conservative growth factor to Harley-Davidson. If we assume a annual growth of 8% over the next 7 years, and a expected return of 12%, Discount Cash Flow model gives a fair value of 16 times the owner's earning, which is about what HDI is trading now. A slightly higher growth of 10% would give a ratio of 18. It looks like Harley-Davidson's stock is no cheap investment vehicle either.

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Sheldon Shi, Ph.D., editor of Buffetteer.com, a site for intelligent investors.


Rating: 3.3/5 (3 votes)

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