Harley-Davidson Final Harley-Davidson A reputable brand name by fanzhongqing


									                                      Harley-Davidson Final

       Harley-Davidson was initially developed in the United States. They have been

developing their motorcycles since 1901. The founder of the first engine blueprints of the firm

was 21-year-old William S. Harley. His effective planning created a product that was unique

and has provided over 100 years of excellent service and motorcycles. The first line of

production of the motorcycles was manufactured in 1903 by William S. Harley and Arthur

Davidson, hence the company name Harley-Davidson. Outstandingly, the company has endured

many obstacles, for example; the great depression and the recent economic setback for the last

few years. Fluctuations in the oil market have made it difficult for many people to make-ends-

meet, and as such, this has put some restraints on Harley-Davidson’s income and profits.

However, they continue to strive for ways to keep themselves upfront and lead the motorcycle

nation. They are internationally striving to continue to stay on top of competition and to maintain

the relationships with dealers, retailers, and customers.


       Drafting up an analysis for the Harley-Davidson business profits and losses gets straight

to the point of how each year had varying outcomes for their financial well-being as they pertain

to recent economic issues the industry had developed over the past three years. The following

figures are the company’s computed ratios:

       Current ratio shows the company can manage to meet the short term liabilities from the

current assets (McGuigan & Rao, 2007). The standard ratio for Harley-Davidson is 2:1. The

current ratio for the year 2006 was 2.2 as opposed to the ratio of 1.8 for 2007. The liquidity

position of the company has been slightly reduced. The company should take steps to increase

the current ratio. Quick Ratio, which is considered a more reliable indicator of the Harley-
Davidson’s ability to meet its short-term financial obligation, shows the liquidity position of the

company (McGuigan & Rao, 2007). Liquid assets are current assets minus stock. Liquid assets

denote assets which can be easily converted into cash. The standard ratio is 1:1, for example in

2006 (2.0:1) and in 2007 (1.6:1). The industry average was 1.8:1 for both 2006 and 2007. In

comparing inventory turnover ratio, it is also clear that more inventories were held in 2007 than

in 2006. This denotes how fast the inventory has been sold. The ratio for the year 2007 (16) was

decreased from the year 2006 (20). A lower turnover implies poor sales and higher ratio implies

strong sales or ineffective buying. In the year 2007, the company had poor sales compared to the

year 2006. In 2007 they were holding at 10.3, whereas 6.1 in 2006. Since the 2006 ratio was

higher than 2007, this implies the poor sales, which left excess inventory (Harley-Davidson,


         Debt ratio shows the relation between the total liabilities of the firm and the equity. It

also shows the leverage of the company along with its potential risk in terms of debt load in its

capital structure. The debt ratio is more than one as the company has more liabilities than equity

(McGuigan & Rao, 2007). The ratio for the year 2007 (2.38) increased from 2006 (2.06). If the

industry average (let us assume) is 1.5:1, then the company is in weak position as the ownership

funds is less than the debt funds (Harley-Davidson, 2009). The net profit margin ratio shows how

much income has been generated from sales in a year (McGuigan & Rao, 2007). Here, 17% was

created in 2006 and 16% in 2007, resulting in a minor decrease in income in comparison to the

industry average (2007 (2.4%) and 2006 (2.4%)). The company is in the better position now as

the company has earned sound profit and can declare a high amount of dividend - or even keep it

as a reserve for increasing the overall financial health of the company. The return on assets ratio

shows how each dollar of asset has generated the income (McGuigan & Rao, 2007). Return on
asset was 18% in 2006 and 16% in 2007. The industrial average was 11.8% for 2007 and 12.7%

in 2006, which shows that the company is not efficient enough in utilizing the assets of the

company and steps needs to be taken to remove the inefficient operations. The P/E ratio shows

ratio between the market value of the share and the earnings per share. The company has been

maintaining 16% as P/E ratio. In the market the P/E ratio average is usually known to be between

15-25 (Investopedia, 2009). Below is a spreadsheet of the industry averages as follows:

Description                                        P/E
Consumer Goods                                     12.642
Auto Manufacturers - Major                         0
Chicago Rivet & Machine Co.                        NA
Daimler AG                                         NA
Ford Motor Co.                                     NA
General Motors Corporation                         NA
Honda Motor Co. Ltd.                               23.096
MotivNation Inc.                                   NA
SORL Auto Parts, Inc.                              2.317
Tata Motors Ltd.                                   3.705
Toyota Motor Corp.                                 14.642
ZAP                                                NA

       Knowing if the P/E ratio is higher, the investors are paying more money to purchase the

shares, and as such, the shares of the company are more costly than the other companies’ P/E

ratio. This leads one to believe the higher the P/E ratio is less risk there is with the company.

Reviewing the chart above, there was only one other company P/E ratio higher than Harley-

Davison’s ratio. Therefore, the investors are paying less to purchase the shares of the company.
                              Long Term Debt Held by the Harley-Davidson

                                                   Finance Debt

Commercial paper                                   $ 842,618       $ 894,250

Credit facilities                                   256,531          191,866

Medium-term notes                                   1,000,806        586,375

Senior subordinated notes —                                            30000

million 2007 2006

Mid-term notes 400 5.60% 5.28% due December 2012

400 5.60% 5.28% due in December 2008

200 5.60% 5.28% due in December 2010

Senior subordinated notes are already paid.

Commercial paper

Yield rate: 2007 4.61%, 2006 5.2%

        There was a total commercial paper borrowings of 1.4 billion under global credit facility

on December 21, 2007. It has to be repaid within the maximum period of 365 days. Therefore, it

has to be paid by December 31, 2008.

Stocks current selling price: High: 51.75, Low: 44.37

                                      Harley-Davidson Types of Stock

                Stock 52 week average: 52 week high: 74.03, 52 week low: 44.37

                Average of 52 weeks :( 74.03+44.37)/2: 59.2

                Other long term liabilities are:

                Pension liability
               Post-retirement healthcare benefits

               Other long-term liabilities

               List of stocks issued:

               1. Common stock

               2. Treasury stock

                                           Working Capital Management

       Working capital is the difference between current assets and current liabilities. Therefore,

working capital management includes management of cash, accounts receivable, inventory,

marketable securities, financial instruments held for sale, accounts payable, accrued liabilities,

etc. The firm must have positive working capital so that it is possible for the firm to continue its

operations without any difficulty and the firm can pay the short term debt and ongoing expenses

in the firm. Otherwise, the company has to rely on other short-term borrowing (McGuigan &

Rao, 2007).

       The aim of working capital optimization is to ensure that the financial performance of the

company is increased by improving the profitability and accountability across the organization

from both internal and external sources (McGuigan & Rao, 2007). Harley-Davidson’s working

capital for 2007 was 1,562,235 and 1,954,956 in 2006; therefore the firm has the positive

working capital and the portion of inventory in the current assets is also less. However, the

working capital in 2007 was reduced from 2006 mainly due to the increase in the current portion

of finance debt and there was a decrease in current asset due to the sale of marketable securities.

It is to be noted that the portion of inventory which are not liquid assets is less than the cash and

cash equivalents and the investments. Therefore, the firm has a sound liquid position.

Furthermore, there was an increase in the current portion of finance debt mainly due to the
increase of fresh issue of finance debt. The firm has to be careful of raising capital at the time of

their next issue because of the increase in interest cost (Harley-Davidson, 2009).

       In my opinion, even though the company has positive working capital, they should not

have issued finance debt which increases the finance cost. In lieu of that, it should have issued

bonus shares to the existing shareholders and can increase the liquid position of the company.

There is positive inflow from operating activities which shows that the company earns cash

income. Since there was a purchase of 1,153,439 treasury stocks, there is negative cash flow with

respect to financing activities (Harley-Davidson, 2009)

                                               Cash Cycle

       A Cash cycle refers to the time it takes for a company to convert resource inputs into cash

flows. The cash cycle attempts to measure the amount of time each net input dollar is tied up in

the production and sales process before it is converted into cash through sales to customers. Cash

cycle takes into consideration the following: the amount of time needed to sell inventory, the

amount of time needed to collect receivables, and the length of time the company is afforded to

pay its bills without incurring penalties (McGuigan & Rao, 2007). The following summarizes the

findings of Harley-Davidson cash cycle:

       Cash cycle: days inventory outstanding + Days sales outstanding – day’s payable


                                       Inventory Conversion Period

         Year                   Inventory             Cost of goods sold            Cash Cycle

2007                      349,697                   3,612,748                 35.33028182

2006                      287,798                   3,567,839                 29.44254772
                                       Receivable Conversion Period

        Year                   Receivable                     Sales                Cash Cycle

2007                     181,217                   5,726,848                 11.5498447

2006                     143,049                   5,800,686                 9.001156932

                                        Payable Conversion Period

        Year                    Payable                 Cost of goods sold         Cash Cycle

2007                     300,188                   3,612,748                 30.32833179

2006                     283,477                   3,567,839                 29.00049722

             Year                                2007                              2006

Cash Cycle                          16.5517947                        9.44320743

       Since there was an increase in the cash conversion cycle from the year 2006 to 2007,

there is no optimization of cash.

                                     Weighted Average Cost of Capital

       The weighted average cost of capital (WACC) is the rate a company is expected to pay to

finance its assets. WACC is also the minimum return that a company must earn on their existing

asset base to satisfy its creditors, owners, and other providers of capital (Wikiwealth, 2008). The

following statistics were used to find Harley-Davidson average WACC for an industry:
                                Weighted Average Cost Table 2007

                                       Overall WACC is 7.6%

                              Debt          Weights       %       Income Tax     Cost

Medium Term Notes            603,300         .179         5.60       36%        .003574

Commercial paper             376,700         .112         4.61       36%        .001837

Equity                     2,375,491         .707         10                    .070794

Total                      3,355,491      1(assumed)                            .076206



                                Weighted Average Cost Table 2006

                                     Overall WACC Rate is 8.05%

                                  Debt         Weights      %      Income tax     Cost

    Medium Term Notes           586,375         .161       5.28      35.80       .003056

        Commercial Paper        253,625         .069       5.20      35.80      .0001302

 Senior Subordinated Notes       30,000         .008       6.79      35.80       .000201

             Equity             2,756,737       .760        10                   .076011

             Total              3,626,737    1(assumed)                          .080571


                                   Comparison to the Industry Average

       It is noted that Harley Davidson controls 9.6% of the market share in motorcycle

registration in Europe and a 48% of the market share in North America (both Canada and

America). In 2007, Harley Davidson had nearly 250,000 units of motor registration and total

industry registration amounting to 266,300 units in North America. However, in Europe, the

company has 13,000 units registered against 387,000 registrations by the rest of other motor

cycle companies (Harley-Davidson, 2009).

                                   Investing Recommendations

       It is advisable to buy the shares of the company because the company has a sound liquid

position as a result of positive working capital and sound current ratio and liquid ratio.

Furthermore, the company’s return on assets was 16% in 2007 and 18% in 2006. Additionally,

the net profit to sales ratio was 16% in the year 2007 and 17% in 2006 which is considered good

operating income. Also, the company has substantial market share, and as such, it is advisable to

buy the company’s share (Harley-Davidson, 2009).


       Harley-Davidson is unique when compared to its competition. There are no other major

motorcycle manufactures in the United States. In Japan, all of Harley-Davidson’s competitors are

much larger and more diversified than they are. There are no Harley cars or lawnmowers, just

motorcycles and motorcycle financing. Harley-Davidson has no non-recurring items. With the

concern for growing wealthier sometimes companies forget what their business is. Harley-

Davidson makes classic super heavyweight motorcycles. They make their motorcycles so well

that no other company even comes close. Harley customer’s are loyal and form the foundation
in which the company was built upon. With demand for their motorcycles at a point where

production is one year behind orders, Harley-Davidson motorcycles can cost as much as twice as

their competitors. By keeping the number of custom super heavyweight motorcycles low,

customers are more excited about the product. There is no substitute for a Harley because each

one is unique. Keeping the total volume low will keep the prices high and allow for a high net

profit margin. By introducing a larger volume of high quality low priced standard motorcycles

Harley-Davidson can appeal to the entry-level market. Also, there will be greater potential for

increased sales of their aftermarket upgrades.

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