In the fourth quarter, guru Tom Gayner added to his stake in Harley Davidson Inc. (HOG, Financial) at an average price of $49.13. The 36% add took the holding to a total of 292,000 shares and represents a 0.09% impact on the portfolio.
Since that period, Harley Davidson has fallen to a price around $43. For patient investors willing to hold for the longer haul, does this represent an opportunity? Or is HOG on a long-term rocky road?
In addition to taking a cue from the guru, investment research could center around three key issues:
1. The quality of company fundamentals.
2. Company-specific activities.
3. The price to value relationship.
History of fundamental performance
Harley Davidson is a company that has earned strong name-brand recognition. And while the past is certainly no guarantee of future success, it is very helpful to review historical performance of fundamental metrics. For this company it seems appropriate to review per share growth in earnings, book value and revenue.
A picture is worth a thousand words. Here is where my F.A.S.T. Graphs subscription is very helpful to visualize data trends. Using the "F.U.N. Graphs" feature allows a visual of each company fundamental individually or combined together. In this case I have selected for per share growth in earnings, book value and revenue. Looking at the trends, HOG has done an impressive job of growing each metric. And while the company is susceptible to the overall macro environment, it has an impressive track record on this metric over the long term.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
Company-specific activities
The past is important, but the future is what matters. So what activities is Harley Davidson management doing to continue to grow this company going forward? Much attention and investment is happening to increase product and brand awareness, and new product development is a top priority. In addition, the company continues its marketing efforts to take advantage of strong customer loyalty to increase ridership.
The risks going forward? As mentioned, HOG is a discretionary luxury item and therefore a bad economy can significantly hurt sales. Competition is fierce and increasing. All of this suggests that investors will need to be patient to give the company time to reap the rewards of current actions.
Is HOG a bargain right now?
Much depends on the earnings going forward. To study the price to value situation at current levels, again F.A.S.T. Graphs is very helpful for a visual representation. In the chart below, the orange line represents earnings history and what could be considered "fair valuation" at a price/earnings multiple of 15X. The blue line represents the company-specific P/E ratio over time. The black line represents the market price.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
Certainly the negative impact of a recession is visible by the decrease in earnings after 2009. Note that the historical PE is over 23X earnings, and the current PE is around 11. This is demonstrated by the blue PE line and black market price line.
Looking another way, note how over the long-term the market price of HOG has gravitated on and around a 15X valuation multiple of earnings (orange valuation line and black market price line). This suggests that over time the market returns to a fair valuation around the 15X level.
Considering either method (the company's own PE norms or a 15X valuation) assuming that EPS lands somewhere around $4.49 next year, HOG is likely fairly or undervalued for longer-term patient investors.
Recap
All in all, Harley Davidson is a company with a solid history of fundamentals, a management team with meaningful strategies in place, and a current price that is fair given Harley’s own historical valuation. Tom Gayner recently added to his position; this may be worth a look for others, too.
