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Harley-Davidson Report


									Ticker:        HOG
Sector:        Consumer Cyclical
Industry:      Recreational Product
Recommendation: BUY
Closing Price     $23.61 (7/19/10)
52-wk High        $36.13
52-wk Low         $18.43
Market Data
Market Cap          $5.56B
Trading Vol.       235.45 Mil.
Total assets        $2.308B
Total Liabilities $2.308B
Valuation (1Q 2010)
EPS               .14
P/E               N/A

P/Book            2.66
Div Yield         1.6%
Profitability & Effectiveness

                                      Harley Davidson is one of the more unique companies
                                      that we have the opportunity to invest in. They no doubt
ROE               13.14%

                                      offer a luxury product that is dependent on consumers’
Debt/Equity       2.67

                                      disposable income and preferences. However, They
Profit Margin     5.69%

                                      possess a global brand highly recognizable across the
                                      world. Additionally they have built a strong consumer
                                      culture that continues to deliver repeat business from
Corporate Information

                                      current owners. The company’s increasing focus on new
                                      growth in the under 35 demographic in addition to
CEO               Keith E. Wandell

                                      female customers is encouraging for future performance.
Auditors          Ernst & Young

                                      Despite poor sales revenue and net income in 2008 and
Opinion           Unqualified

                                      2009 I feel this company provides our portfolio with an
                                      opportunity to experience strong returns in the coming
Employees         7,300

                                      years as the job market strengthens and the recession
                                      alleviates. Strong second quarter earnings for 2010 have
Analyst: Doug Wood

                                      indicated Harley Davidson is ready to return to pre
                                      recession form and potentially surpass historical

                                      numbers. I recommend purchasing 100 shares of Harley
                                      Davidson, however, I encourage you to voice your
                                      opinion on this amount.
                            Company Description
Harley-Davidson, Inc., incorporated in 1981, operates in two business segments: the
Motorcycles & Related Products segment and the Financial Services segment. The
Motorcycles segment designs, manufactures and sells at wholesale primarily heavyweight
touring, custom and performance motorcycles, as well as a line of motorcycle parts,
accessories, general merchandise and related services. The Financial Services segment
consists of Harley-Davidson Financial Services (HDFS). HDFS provides wholesale and
retail financing and, as an agent, provides insurance and insurance-related programs
primarily to Harley-Davidson Motor Company dealers and their retail customers. HDFS
conducts business principally in the United States and Canada.

Motorcycles & Related Products

The primary business of the motorcycles segment is to design and manufacture
motorcycles for the heavyweight market and sell them at wholesale. The Company
manufactures five families of motorcycles: Touring, Dyna, Softail, Sportster and VRSC.
The Company’s worldwide motorcycle sales generated approximately 75 percent of the
total net revenue in the motorcycles segment during the year ended December 31, 2009.
The total motorcycle market, including the heavyweight portion of the market, comprises
four segments: standard, performance, custom and touring. The touring segment includes
the Harley-Davidson Touring family of motorcycles, which are equipped with fairings,
windshields, saddlebags and luggage carriers. The custom segment of the market includes
motorcycles featuring the distinctive styling associated with classic Harley-Davidson
motorcycles and includes the Company’s Dyna, Softail and VRSC motorcycle families,
as well as a portion of the motorcycles in the Sportster family. The Company’s Sportster
family also serves the standard segment of the market.

The Parts and Accessories products comprises of replacement parts (Genuine Motor
Parts) and mechanical, and cosmetic accessories (Genuine Motor Accessories).
Worldwide P&A net revenue comprised 17.9 percent of net revenue in the motorcycles
segment, in 2009. Worldwide General Merchandise net revenue, which includes revenue
from Motor Clothes apparel and accessories, comprised 6.6 percent of net revenue in the
Motorcycles segment, in 2009. The Company’s licensed products include t-shirts, vehicle
and vehicle accessories, jewelry, small leather goods, toys and other products.

During 2009, the Company shipped 223,023 Harley-Davidson motorcycles, a decrease of
80,456 motorcycles, or 26.5%, from last year. The Company’s shipments in the U.S. in
2009 continued to be negatively impacted by the challenging economic environment. On
January 22, 2010, the Company announced that it expects full year 2010 shipments of
Harley-Davidson motorcycle units to be 201,000 to 212,000. This represents a 5% to
10% reduction from 2009 shipments as a result of two key factors. First, the Company
expects global economies to remain challenging, specifically in the U.S. with continued
high unemployment and low consumer confidence. Second, the Company expects
continued price competition from other manufacturers as they reduce excess inventories,
in particular, old model year motorcycles

Financial Services

HDFS is engaged in the business of financing and servicing wholesale inventory
receivables and retail consumer loans, primarily for the purchase of Harley-Davidson
motorcycles. In addition, HDFS is an agent for certain unaffiliated insurance carriers
providing property/casualty insurance and also sells extended service contracts, gap
coverage and debt protection products to motorcycle owners. HDFS conducts business in
the United States and Canada. HDFS provides retail financing to consumers, including
installment lending for the purchase of new and used Harley-Davidson and Buell
motorcycles. HDFS’ retail financial services are available through most Harley-Davidson
motorcycle dealers in the United States and Canada.

                      The recession forces a new focus

 On October 15th 2009 newly elected CEO Keith Wandell revealed a new corporate long-
term strategy that aimed to address Harley Davidson’s struggling operations amidst the
recession. The plan addressed a four-step process aimed at improving revenue through
improved cost cutting strategies and an increase in market growth through a strengthened

Customer & Brand Growth

Young adults, those under age 35, hold the HD brand in virtually the same high esteem as
long-time customers. For the new generation, Harley has created motorcycles,
experiences and entire communities, both real world and virtual, to immerse them in the
brand, expand their universe of enthusiasts and make them customers for life.
Bikes like the Iron 883,one of their best selling introductory level motorcycles in 2009,
have done exceedingly well among young adults.
Harley’s Rider’s Edge New Rider Course is instrumental in growing new relationships,
helping more than 200,000 students take to the streets with confidence since 2000. 33
percent of them are under age 35 and 37 percent are women. They continue to introduce
themselves to prospective customers through venues like the South By Southwest music
and culture festival, online communities, and Garage Party events just for women.

The Harley-Davidson brand has remarkable global strength. Their motorcycles now roll
out of dealerships in more than 70 countries on six continents. By 2014, plans call for
international retail sales of Harley-Davidson motorcycles to exceed 40 percent of total
retail unit sales.

Europe continues to be a prime Harley- Davidson destination, fueling the demand in
more mature international motorcycle markets. HD is a major player in Europe, climbing
into the number three spot in the heavyweight segment in 2009 with a market share that’s
double what it was a decade ago.

Cutting Costs

Revenue from sales of Harley-Davidson motorcycles decreased to $3.17 billion in 2009,
a decline of 25.2 percent from 2008, on a 26.5 percent reduction in shipments of Harley-
Davidson motorcycles. Revenue from Genuine Parts and Accessories in 2009 totaled
$767.3 million; a 10.7 percent decrease from the previous year, and General Merchandise
revenue was $282.2 million, a decrease of 10.1 percent compared to 2008.

During 2009, Harley-Davidson took actions to lower its cost structure through
eliminating excess capacity, reducing administrative costs and exiting non-core business
operations. Consequently, 2009 results were significantly affected by non-recurring
charges. Harley-Davidson expects restructuring activities announced in 2009 to deliver
between $240 million and $260 million in annual ongoing savings upon completion of
those restructuring activities.
The HD will discontinue production of Buell motorcycles, a subsidiary company of HD
that specializes in production and sales of sport and racing motorcycles. Remaining
inventories of Buell motorcycles, accessories and apparel, while they last, will continue
to be sold through authorized dealerships. Warranty coverage will continue as normal for
Buell motorcycles and the Company will provide replacement parts and service through

Harley-Davidson expects to incur approximately $125 million in one-time costs related to
the discontinuation of the Buell product line. The Company incurred approximately $115
million of that amount in 2009.

HD will also be dumping its relatively recent interest in MV Agusta, which is based in
Varese, Italy. In the third quarter 2009, Harley-Davidson recorded a one-time fixed-asset
impairment charge of $14.2 million related to Buell and a goodwill impairment charge of
$18.9 million related to MV Agusta.

                            Significant Risk Factors
Reliance on independent distributors and dealers

The Harley Davidson depends on the capability of its independent dealers and
distributors to develop and implement effective retail sales plans to create demand among
retail purchasers for the motorcycles and related products and services that the dealers
and distributors purchase from the Company. If the Company’s independent dealers and
distributors are not successful, then HD will be unable to maintain or grow its revenues
and meet its financial expectations.

The Harley Davidson may experience a further decline in retail sales resulting from
general economic conditions and tightening of credit.

The motorcycle industry has been affected by general economic conditions over which
motorcycle manufacturers have little control. These factors have caused a weaker retail
environment leading to weaker demand for purchases, and the decision to purchase a
motorcycle has been and may continue to be affected by these factors. The related
tightening of credit has led to more limited availability of funds from financial
institutions and other lenders and sources of capital which has negatively affected and
could continue to adversely affect the ability of retail consumers to obtain loans for the
purchase of motorcycles from lenders, including HDFS

Many of HD’s competitors are more diversified than them, and they may compete in the
automotive market or all segments of the motorcycle market. Also, HD’s manufacturer’s
suggested retail price for its motorcycles is generally higher than its competitors, and if
price becomes a more important competitive factor for consumers in the heavyweight
motorcycle market, HD may be at a competitive disadvantage

Continued growth of the Harley Davidson Brand

The Harley-Davidson brand has significantly contributed to the success of HD’s business
and that maintaining and enhancing the brand is critical to expanding its customer base.
Failure to protect the brand from infringers or to grow the value of the Harley-Davidson
brand may have a material adverse effect on the Company’s business and results of


For 2009, the data shows that of approximately 304,000 new registrations of U.S.
heavyweight motorcycles, about 53 percent were Harley-Davidson brand bikes. Other
motorcycle brands being sold in the U.S. heavyweight market include Honda, Suzuki,
and Yamaha. Heavyweight motorcycles sold in the U.S. represent a relatively small
percentage of worldwide unit sales of motorbikes, which include smaller or less-powerful
machines that may be referred to as motor scooters.

Factors that are likely to affect motorcycle sales are personal income and spending levels,
consumer confidence, levels of unemployment, demographics, and the amount of free
time people have available. S & P expects that an aging population, and the impact that
this has on consumer demand, will limit opportunities for industry sales growth. In the
U.S., it is believed that efforts will increase to encourage the number of female
motorcycle riders.

Harley is considered by many analysts to be in its own subsector of the of the consumer
recreational vehicles due to its unique culture and high end products. Over the past two
years HD has been severely hit more so than others in the recreational industry.
Performance in this industry is directly correlated to consumer disposable income and
credit availability.
                    Harley’s performance over the past 5 years relative to the S&P 500

                                            Competitive Comparison

                                  Operating            Profit                                          Return          Mkt
             Revenues               Margin            Margin             NI      ROA           ROE    On capital       Cap

Davidson         4.78 B               9.38%             -1.15    (55.12 M) -0.65%            -2.61%        -0.68%    5.56 B
Brunswick        2.78 B             -14.34%            -21.12    (586.2 M) 19.76%           -124.7%           N.A.   1.18 B
Polaris          1.57 B              10.54%              6.45    101.02 M 13.34%             59.15%        27.99%    1.99 B
Carnival        13.16 B              16.37%              13.6       1.79 B  5.10%             8.70%         7.16%    26.1 B
            2009 Competitive Comparison relative to others in the consumer goods industry

            Harley Davidson is not the only company to struggle relative to the industry. Brunswick
            Corporation, a manufacturer of pool tables and other game tables has felt the impact from
            constricted consumer spending. However, Polaris, a motor sports manufacturer, and
            Carnival cruise lines have managed to do fairly well with return on capital of 28 percent
            and seven percent respectfully. This competitive chart is a good indication of how
            volatile the industry is that HD is in, revenues highly depend on how the consumer
            chooses to spend their money and the amount they are willing to spend on certain luxury

To calculate a reasonable estimate of Harley Davidson Inc’s intrinsic value, I used the
Owners’ Earnings Model. I calculated CAPM using Bloomberg’s 10-year raw beta
estimate of HD to equal 1.69. Using the risk free rate of three percent and an expected
market return of 11 percent, the discount rate is calculated:

K = .03 + 1.69(.11 - .03)

K = 16.52%

Harley Davidson took a hit in sales of nearly 26 percent in 2009 due to restricted
disposable income and high unemployment rates. Concluding from strong first and
second quarter earnings in 2010 I estimated sales growth to jump heavily by 17 percent,
2011 growth to recapture the remaining loss with 15 percent, and 2012 growth to be six
percent. I followed a conservative growth rate for 2013 and beyond with seven percent
and increasing to 7.5 percent after 2014 due to unforeseen economic conditions and
restraints on consumer spending. However, I feel this growth rate is realistic considering
Harley Davidson’s new corporate cost structure and their ability to expand on an
extremely strong and recognizable brand

My intrinsic value for Harley Davidson using the Discounted Cash Flow model is:
$ 24.41 compared with a trading value of $23.61 on 7/19/10

     Historical 5-year stock price

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