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Harley-Davidson: A Dominant Position in the Motorcycle Market

September 02, 2014 | About:

In this article, let's take a look at Harley-Davidson, Inc. (NYSE:HOG), a $13.82 billion market cap company, which is a leading maker of heavyweight motorcycles also produces a line of motorcycle parts and accessories.

More than 100 years old

The company plans to continue producing high-quality products and so, improving operational efficiency becomes relevant. Harley-Davidson has a leading market share. Last year, domestic sales increased 4%, industry unit sales expanded 2% while European sales fell 3%. With about 55% of the U.S. heavyweight segment it has strong competitors such as Honda (NYSE:HMC), Yamaha and Suzuki (SKI) in the lightweight division. This segment tend to have lower margins, but we think that cost effective actions should offset it.

We see as a principal risk that there are no switching costs to protect the brand when the consumer replaces its product and considering that competitors are cheaper this could be negative in cyclical downturns.

Restructuring plan

The company has completed its 2009 restructuring plan, reducing redundancies or exiting from non-core businesses. 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.

The firm is dynamic because it is continuing adapting to the changing demographic demands of consumers. Although the core consumer is a caucasian man of 35 years or more, other targets like African-Americans, Hispanics, women, and youths, are becoming more important over the next decade.

Revenues, Margins and Profitability

Looking at profitability, revenue growth by 11.5% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.62vs $1.21). During the past fiscal year, the company increased its bottom line by earning $3.27 versus $2.71 in the prior year. This year, Wall Street expects an improvement in earnings ($3.78 versus $3.27).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.



ROE (%)


Harley Davidson



Winnebago Industries



General Motors



Tesla Motors



Industry Median


The company has a current ROE of 24.39% which is higher than the industry mean and the ones exhibit by Tesla Motors (NASDAQ:TSLA) and General Motors (NYSE:GM). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Winnebago Industries (NYSE:WGO) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.


Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 16.3x, trading at a discount compared to an average of 16.9x for the industry. To use another metric, its price-to-book ratio of 4.12x indicates a premium versus the industry average of 1.57x while the price-to-sales ratio of 2.24x is above the industry average of 0.69x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. Also, the company has demonstrated a pattern of positive earnings per share growth over the past years. If you had invested $10.000 five years ago, today you could have $29.251, which represents a 23.9% compound annual growth rate (CAGR).


Final comment

I feel bullish on this stock because it has more than a century of experience manufacturing large-displacement bikes, good brand strength and a dominant position in the industry.

For the reasons discussed in this article, I would recommend to add this stock to long-term portfolios.

Hedge fund gurus like Jim Simons (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

Omar Venerio is capital markets, derivatives, corporate finance and financial management professor. He is passionate about the stock market and providing independent fundamental research and hedge fund and insider trading-focused investigation.

Rating: 5.0/5 (1 vote)



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