Harley-Davidson Stock Is Believed To Be Significantly Overvalued

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Jun 17, 2021
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The stock of Harley-Davidson (NYSE:HOG, 30-year Financials) appears 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 $46.42 per share and the market cap of $7.1 billion, Harley-Davidson stock gives every indication of being significantly overvalued. GF Value for Harley-Davidson is shown in the chart below.

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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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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Harley-Davidson has a cash-to-debt ratio of 0.29, which is worse than 69% of the companies in Vehicles & Parts industry. GuruFocus ranks the overall financial strength of Harley-Davidson at 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:

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It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low 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 75% 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:

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Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Harley-Davidson is -6.9%, which ranks worse than 75% of the companies in Vehicles & Parts industry. The 3-year average EBITDA growth rate is -41.3%, which ranks in the bottom 10% of the companies in Vehicles & Parts industry.

One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Harley-Davidson’s ROIC is 3.29 while its WACC came in at 5.31. The historical ROIC vs WACC comparison of Harley-Davidson is shown below:

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In summary, The stock of Harley-Davidson (NYSE:HOG, 30-year Financials) gives every indication of being 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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