Student Managed Fund-Stock Analysis Report
Prepared by: Patrick Mastan
November 3, 2003
Harley-Davidson Inc. (NYSE-HDI)
Large Cap: $14.6 billion
Industry: Recreational Products
Sector: Consumer Cyclical
Valueline: Timeliness: 2
Safety:
3
Technical: 5
Business Summary
Harley-Davidson, Inc. was incorporated in 1981, at which time it purchased the HarleyDavidson® motorcycle business from AMF Incorporated in a management buyout. In
1986, Harley-Davidson, Inc. became publicly held. Unless the context otherwise requires,
all references to the “Company” include Harley-Davidson, Inc., all of its subsidiaries and
all of its majority-owned affiliates. The Company operates in the Motorcycles & Related
Products segment and the Financial Services segment. The Company’s reportable
segments are strategic business units that offer different products and services. They are
managed separately based on the fundamental differences in their operations.
The Motorcycles & Related Products (Motorcycles) segment includes the group of
companies doing business as Harley-Davidson Motor Company (Motor Company),
subsidiaries of H-D Michigan, Inc., and Buell Motorcycle Company LLC (BMC). The
Motorcycles segment designs, manufactures and sells primarily heavyweight (engine
displacement of 651+cc) touring, custom and performance motorcycles as well as a
complete line of motorcycle parts, accessories, clothing and collectibles. The Company,
which is the only major American motorcycle manufacturer, has held the largest share of
the United States heavyweight (651+cc) motorcycle market since 1986 and ended 2002
with a domestic market share of 47.5% (Harley-Davidson models only) (Data provided
by the Motorcycle Industry Council).
The Financial Services (Financial Services) segment consists of the Company’s
subsidiary, Harley-Davidson Financial Services, Inc. and its subsidiaries (HDFS). HDFS
is engaged in the business of financing and servicing wholesale inventory receivables and
consumer retail installment sales contracts (primarily motorcycles and aircraft).
Additionally, HDFS is an agency for certain unaffiliated insurance carriers providing
property/casualty insurance and extended service contracts to motorcycle owners.
Financial Data/Ratio Comparisons
For the 9 months ended 9/28/03, sales rose 14% to $3.68B. Net income rose 35% to
$578.5M. Revenues reflect increased Harley- Davidson unit shipments and an increase in
financing income. Net income also reflects improved gross operating margins.
Key Ratios & Statistics
Price & Volume
Valuation Ratios
Recent Price $
47.33
Price/Earnings (TTM)
52 Week High $
54.94
Price/Sales (TTM)
3.03
52 Week Low $
35.01
Price/Book (MRQ)
5.23
Avg Daily Vol (Mil)
2.03
Price/Cash Flow (TTM)
Beta
1.28
Per Share Data
19.76
15.68
Share Related Items
Earnings (TTM) $
Mkt. Cap. (Mil) $
14,324.95
Sales (TTM) $
Shares Out (Mil)
302.66
Book Value (MRQ) $
9.05
Float (Mil)
301.90
Cash Flow (TTM) $
3.02
Cash (MRQ) $
4.60
Dividend Information
2.40
15.64
Yield %
0.34
Mgmt Effectiveness
Annual Dividend
0.16
Return on Equity (TTM)
30.30
Payout Ratio (TTM)
%
4.77
Return on Assets (TTM)
17.88
Return on Investment
(TTM)
23.63
Financial Strength
Quick Ratio (MRQ)
2.24
Profitability
Current Ratio (MRQ)
2.53
Gross Margin (TTM) %
33.58
LT Debt/Equity
(MRQ)
0.14
Operating Margin (TTM)
%
23.21
Total Debt/Equity
(MRQ)
0.26
Profit Margin (TTM) %
15.31
Valuation Ratios
RATIO COMPARISON
Valuation Ratios
Company
Industry
Sector
S&P 500
P/E Ratio (TTM)
19.76
20.35
18.41
25.04
P/E High - Last 5 Yrs.
49.48
44.59
38.18
47.92
P/E Low - Last 5 Yrs.
18.80
14.12
9.79
16.16
Beta
1.28
0.85
1.03
1.00
Price to Sales (TTM)
3.03
2.17
1.13
3.30
Price to Book (MRQ)
5.23
4.19
3.17
4.29
Price to Tangible Book (MRQ)
5.23
4.75
7.44
7.21
Price to Cash Flow (TTM)
15.68
18.67
12.11
19.26
Price to Free Cash Flow (TTM)
23.65
27.07
17.39
31.31
% Owned Institutions
69.84
54.38
48.96
63.97
PERFORMANCE GRAPH
Comparison of Five Year Cumulative Total Return*
Harley-Davidson, Inc.
S&P MidCap 400
S&P 500
1997
$100
$100
$100
1998
$175
$119
$129
1999
$237
$137
$156
*Assumes $100 invested on December 31, 1997
2000
$295
$160
$141
2001
$403
$160
$124
2002
$342
$135
$95
Chart
Recent News
New Issue-Harley-Davidson sells $300 M in asset-backed securities
NEW YORK, Oct 16, 2003 (Reuters) -- Harley-Davidson Inc. (HDI) sold $300 million of
asset-backed securities supported by motorcycle loans, syndicate sources said on
Thursday. Wachovia Securities was lead manager of the deal, while J.P. Morgan was comanager.
Harley-Davidson Financial Services Rides Away With the 2003 AFP Pinnacle
Award Grand Prize (Buckeye Technologies and the Ohio State University
Recognized for Outstanding Innovation and Technology in Treasury and Finance)
BETHESDA, Md., Oct 15, 2003 (PRNewswire via COMTEX) -- Harley-Davidson
Financial Services, Inc.(HDFS) received the 2003 Association for Financial Professionals
(AFP) Pinnacle Award grand prize for its creation of EPAY, an Internet-based statement
presentment and payment program for the nationwide Harley-Davidson dealer network.
The award will be presented during the Opening General Session at The AFP 24th
Annual Conference in Orlando, November 2-5.
EagleRider, Renter of Harley-Davidson, Inc. Motorcycles, Adds New Choices to the
Tours of Suntrek
NEW YORK, Sep 30, 2003 (Reuters) -- Harley-Davidson, Inc. announced that it has
joined forces with Suntrek in a new program that will offer Harley-Davidson motorcycles
in Suntrek's new 2004 tour catalog. In the new Suntrek/EagleRider alliance, HarleyDavidson motorcycles will be made available to those Suntrek tour participants who
would prefer the "open air" on a motorcycle.
Risk Analysis
Board of Directors
Jeffrey L. Bleustein
Donald A. James
James A. Norling
Barry K. Allen
Chairman of the Board/President & CEO
Chairman and Chief Executive Officer of Fred Deeley Imports Ltd.
Retired as the Executive Vice President of Motorola, Inc
Executive Vice President and Chief Human Resources Officer of
Qwest Communications International Inc.
Richard I. Beattie
Partner of Simpson Thacher & Bartlett
George H. Conrades Chairman and Chief Executive Officer of Akamai Technologies,
Inc.
Sara L. Levinson
President of the Women’s Group of Rodale, Inc.
George L. Miles
President and Chief Executive Officer of WQED Multimedia
The Board has determined that all current directors, other than Jeffrey Bleustein and
Donald James, qualify as independent directors of the Company under the proposed rules
of the New York Stock Exchange, Inc.
Insider Trading
INSIDER & RULE 144 TRANSACTIONS REPORTED - LAST TWO MONTHS
Date
16-Oct-03
Insider
Shares
Transaction
Value*
BERRYMAN, GARRY S.
71,042
Planned Sale
$3,491,7141
71,042
Option Exercise at $14.41 - $44.41 per share.
N/A
71,042
Sale at $48.25 - $48.99 per share.
$3,454,0002
10,000
Option Exercise at $14.41 per share.
$144,100
10,000
Sale at $49.99 per share.
$499,900
10,000
Planned Sale
$498,2001
6,200
Sale at $50.21 per share.
$311,302
Vice President
16-Oct-03
BERRYMAN, GARRY S.
Vice President
16-Oct-03
BERRYMAN, GARRY S.
Vice President
28-Aug-03 HUTCHINSON, RONALD M.
Vice President
28-Aug-03 HUTCHINSON, RONALD M.
Vice President
28-Aug-03 HUTCHINSON, RONALD M.
Officer
21-Aug-03 BROSTOWITZ, JAMES M.
Controller
21-Aug-03 BROSTOWITZ, JAMES M.
6,200
Option Exercise at $6.09 per share.
$37,758
29,144
Planned Sale
$1,448,7481
4,000
Sale at $50 per share.
$200,000
600
Sale at $50 per share.
$30,000
4,000
Planned Sale
$200,0001
600
Planned Sale
$30,0001
59,500
Sale at $49.26 per share.
$2,930,970
61,812
Option Exercise at $14.41 - $25.8 per share.
N/A
Controller
21-Aug-03 BROSTOWITZ, JAMES M.
19-Aug-03 ZIEMER, JAMES L.
Chief Financial Officer
19-Aug-03 ZIEMER, JAMES L.
Chief Financial Officer
19-Aug-03 ZIEMER FAMILY LIMITED PARTNERHIP
19-Aug-03 ZIEMER FAMILY FOUNDATION
15-Aug-03 HEVEY, JOHN A.
Vice President
15-Aug-03 HEVEY, JOHN A.
Vice President
Models:
Risk Free Rate: 4.18%
S&P 500 10 Year Return: 7.93%
Beta: 1.28
1. Required Rate of Return
k = rf+ β(rm-rf): 8.98%
Earnings 1994: 0.34
Earnings 2002: 1.90
ge = (1.90/0.34) ^(1/9)-1= 21.07% Average growth in EPS from 1994-2002
Average ROE: 23.06% (8 year average)
Average Retention: 1-[(19.7%+19.1%+18.5%+18.4%+20.7%+22.6%+22.9%+24.1%)/8]
=79.25%
Gr: ROE*retention ratio (b)= 23.06%*79.25%= 18.28%
Average g: (29.89%+26.55%+32.87%)/3 = 29.77%
k<g
Since the growth rate is higher than the required rate of return, the investment should be
made.
2. P/E Model
Avg P/E ratio 30.0
Expected EPS (VLIS) = $2.65
5-Year Horizon: 3.75
P/E Ratio: 22.36
Projected high price for the next 5 years: 22.36 * $3.75 = $83.85
Lowest price in the last 3 years: $35.01
Current Price: $47.33
Quartiles
Strong buy: $ 35.01 - $47.22
Weak buy:
$ 47.22 - $59.43
Hold:
$ 59.43 - $71.64
Sell:
$ 71.64 - $83.85
Upside potential:
$83.85-47.33 = $36.52
Downside potential $47.33-35.01 = $12.32
Upside/Downside potential: 2.96
We recommended buying Harley-Davidson on October 23, when the current price was
$47.33, which puts this investment within $.11 of a strong buy based on historical
figures.
3. Valuepro.net
Intrinsic Value
Growth Rate
Risk Free Rate
WACC
84.33
16.5%
4.18
7.91
4. Valueline Model
HDI: Long Term Debt + Shareholder Equity:
Growth Rate:
Common Shares Outstanding:
Average Annual P/E Ratio:
Return on Total Capital:
The Future Price: 2,612.9 * 1.165^10 / 302.66 * .18 * 25 =
100 / 1.15^10 (Discount the future price) =
2,612.9 (million)
16.5%
302.66 (million).
25
18%
$178.91
$44.22
At the current price we are overpaying for Harley-Davidson using conservative estimates.
With a required rate of return of 14%, our buy price would be $48.26, which is greater
than the current price. We feel that purchasing Harley-Davidson will add substantial
value to our portfolio because of the company’s future earnings potential. We feel
confident that Harley-Davidson will continue to grow at similar rates evidenced in the
past 10 years due to the company’s incredible market share. Harley-Davidson is the only
major American manufacturer of heavyweight motorcycles. The company not only has a
48.2% market share for heavyweight motorcycles (651 +cc) in the United States, but also
a 30.8% market share in the world.
5. Recommendation
Buy 317 shares at $47.33 = $15,003.61
Downside review:
$ 42.60 (-10%)
Stop loss:
$ 40.23 (-15%)
Upside review:
$ 54.43 (15%)
Vote results
for: 10 against: 0 Abstain:
Trade executed by: Dr. Ghosh