The stock of Harley-Davidson (NYSE:HOG, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $47.29 per share and the market cap of $7.3 billion, Harley-Davidson stock gives every indication of being significantly overvalued. GF Value for Harley-Davidson is shown in the chart below.
Because Harley-Davidson is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Harley-Davidson has a cash-to-debt ratio of 0.29, which is worse than 68% of the companies in Vehicles & Parts industry. The overall financial strength of Harley-Davidson is 4 out of 10, which indicates that the financial strength of Harley-Davidson is poor. This is the debt and cash of Harley-Davidson over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Harley-Davidson has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4.2 billion and earnings of $1.23 a share. Its operating margin is 9.05%, which ranks better than 77% of the companies in Vehicles & Parts industry. Overall, the profitability of Harley-Davidson is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Harley-Davidson over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Harley-Davidson's 3-year average revenue growth rate is worse than 77% of the companies in Vehicles & Parts industry. Harley-Davidson's 3-year average EBITDA growth rate is -41.3%, which ranks in the bottom 10% of the companies in Vehicles & Parts industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Harley-Davidson's return on invested capital is 3.29, and its cost of capital is 5.35. The historical ROIC vs WACC comparison of Harley-Davidson is shown below:
To conclude, the stock of Harley-Davidson (NYSE:HOG, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Vehicles & Parts industry. To learn more about Harley-Davidson stock, you can check out its 30-year Financials here.
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