February 6th, 2015
Consumer Goods
Harley Davidson
Ticker: HOG
Recommendation: Buy
Current Price: $61.68
Price Target: $72.86
Investment Thesis
Key Statistics
52 Week Price Range
50-Day M oving Average
$65.56
1.15
Dividend Yield
1.70%
3-Year Revenue CAGR
Success of Project Rushmore and Touring products will drive U.S. sales
growth

Successful penetration of new U.S. demographic targets will strengthen
HOG’s current leading market share for 601+cc motorcycle units

Growing momentum in Japanese and European motorcycle sales will
increase cash flows
$54.22 - $74.13
Estimated Beta
M arket Capitalization

$16,093 
Flexible “Surge Manufacturing” process will enable company to produce
highly demanded bikes with precise timing
5.45%

Trading Statistics
Diluted Shares Outstanding
220
Average Volume (3-M onth)
3,576,539
Cost cutting benefits from restructuring to be continually recognized in
margin expansion
Five-Year Stock Chart
Institutional Ownership
Insider Ownership
82%
1%
$100
25000000
$90
$80
EV/EBITDA (LTM )
8.8x
20000000
$70
$60
Margins and Ratios
15000000
$50
Gross M argin (LTM )
48.81%
EBITDA M argin (LTM )
27.13%
Net M argin (LTM )
14.68%
$40
10000000
$30
$20
Debt to Enterprise Value
0.20
5000000
$10
$2/2/2010
0
2/2/2011
Volume
2/2/2012
Adj Close
2/2/2013
50-Day Avg
2/2/2014
200-Day Avg
John Roskos
1
University of Oregon Investment Group
University of Oregon Investment Group
Business Overview
Incorporated in 1981, Harley-Davidson (HOG) is a global manufacturer of
“cruiser” and “touring” motorcycles. The company’s roots extend back to 1903,
when William Harley and childhood friend Arthur Davidson collaborated on a
U.S. Motorcycle Registration Data (In Thousands)
plan to power a pedal-bicycle with an engine. Incorporated in Milwaukee,
Year Total Registrations HOG Registrations HOG % Share
Wisconsin, Harley-Davidson is one of only two American motorcycle
2011
289.9
150.9
52.05% manufactures to survive the Great Depression and more recently the 2009
2012
299.4
161.3
53.87% recession.
Harley-Davidson SEC Filings
2013
305.9
167.8
54.85%
Harley maintains a strong leading market share in all of their major geographic
and demographic target areas. For years, Harley faced limited competition in the
United States in the Touring and Cruiser bike segments. However, Polaris
Industries recently re-opened the Indian motorcycle line, threatening Harley’s
position. Despite the fresh competition, Harley has maintained a strong leading
market share within the U.S. for five straight years. Internationally, HOG
currently holds the No. 2 position in Europe for market share, leads in Japan, and
is growing footholds in developing motorcycle markets (Brazil, India, and China).
The company operates in two main segments: the Motorcycles and Related
Products segment and Financial Services (HDFS).
Motorcycles & Related Products
Harley-Davidson SEC Filings
Consisting of nearly 90% of HOG’s total revenue, the Motorcycles and Related
Products segment involves the design and wholesale of motorcycles along with
Revenue in Millions % of Total Revenue lines of motorcycle parts, accessories, and merchandise. Within this segment,
4176.63
85.95%
worldwide sales of motorcycle units generated 77% of segment revenues last year.
Motorcycle & Related Products
Year
2010A
2011A
4662.26
87.77%
2012A
4942.58
88.57%
2013A
5258.29
89.13%
2014A
5567.68
89.39%
Instead of opening and operating company run dealerships, HOG operates through
a network of independent dealers. These dealers are responsible for the purchase
and sale of motorcycles and accessories, and operate not only in North America,
but Europe, the Middle East, Africa, Asia-Pacific, and Latin America.
The company sells through two different dealership types; main full-time
dealerships and Seasonal Retail Outlets (SRO). The flexibility of the SRO allows
Harley to strategically capture a diverse consumer base during peak selling
seasons.
Harley currently offers 34 different bike models that fall under 5 categories;
Standard, Sportbike, Cruiser, Touring, and Dual. Pricing ranges for these models
begin at the low cost Street models ($6,799) and peak at the Custom CVO models
($36,349). A full breakdown of model prices can be found in Appendix A.
Harley-Davidson SEC Filings
Year
2010A
2011A
2012A
2013A
2014A
Harley Davidson Financial Services (HDFS)
To compliment HOG’s motorcycle division, the company offers a financial
servicing arm. Currently, HDFS consists of 4.18% of total revenue. The HDFS
Financial Services
segment provides wholesale and resale financing along with insurance programs
Revenue in Millions % of Total Revenue to Harley dealers and customers. The HDFS segment only services U.S. and
682.71
14.05%
Canadian customers.
649.45
12.23%
Although Harley does not require their independent retailers to utilize HDFS, as
637.92
11.43%
of 2013, the company reported that 100% of HOG dealers in U.S. and Canada
641.58
10.87%
used the company’s financing services. HDFS continually issues a substantial
660.83
10.61%
amount of debt to fund the financing services ($3.76B as of the last SEC filing),
but has shown no signs of being unable to repay. The company has been rated
Baa1, A-, and A- by Moody’s, Standard & Poor’s, and Fitch respectively.
UOIG 2
University of Oregon Investment Group
Strategic Positioning
Loyal Customer Base
Harley-Davidson has done a wonderful job of developing a loyal customer base
by creating a motorcycle culture. The “Harley Experience” is built on quality
craftsmanship, high performance, and a respect that comes with riding the brand.
2011
2012
2013 Being the longest running motorcycle company in America has allowed them to
134.3
195.8
219.8 build a name stronger than any.
45.79% 12.26%
This unique brand strength is one way the company differentiates itself from
Polaris and their re-release of Indian motorcycles. As of 2014, there were more
than 700,000 motorcyclists who belonged to Harley riding groups in the U.S. and
Canada. As the amount of Harley-Riders grows, so does the strength of the name.
Polaris Industries Motorcycle Sales
$ In Millions
PII Motorcycle Sales
% Growth
To foster this cult like following, the company has created the Harley Owners
Group. By becoming a Harley-Davidson member, riders instantly receive benefits
like roadside assistance, discounts at Best Western hotels, and access to
2013
motorcycle rallies. The company views the customer experience as the center of
4067.5 much of the company’s marketing strategy. As of 2014, the Harley Owners Group
8.04% had more than 1 million members.
Harley-Davidson Motorcycle Sales
$ In Millions
2011
2012
HOG Motorcycle Sales
3554.5
3764.8
% Growth
7.16%
5.92%
Cost Management and Flexible Production
Harley-Davidson Inventory Levels
2010A
Inventory
Days Inventory Outstanding
% of Revenue
2011A
2012A
2013A
2014A
326.4
418.0
393.5
424.5
25
29
26
26
6.72%
7.87%
7.05%
7.20%
Harley Davidson is currently on the back end of a restructuring program designed
to improve profitability and effectively manage inventory levels. In 2013, the
company completed the implementation of their 4 year restructuring initiative.
With the goal of increasing margins through cost cutting and surge inventory
management, Harley has experienced a roughly $0.5B benefit in cost savings
since 2009. The company has suggested that cost cutting benefits will continue to
be recognized, and an increase in margins is reflected in my projections.
448.9
Because the company is vertically integrated, manufacturing processes are closely
26 scrutinized to find room for improvement. 2014 marked the company’s second
7.21% year of their “Surge Production” plan. Demand for HOG’s bikes is seasonal, with
peak sales occurring in the late spring and early summer months. To accurately
meet demand, Harley opened a surge production plant in York, PA that allows the
company to time production with sales patterns.
Project Rushmore
Harley-Davidson Touring Sales
2011A
2012A
2013A
2014A
92002
99496
107213
111240
% Change
12.30%
8.15%
7.76%
3.76%
% Of Total
39.47%
40.18%
41.16%
41.00%
Touring Motorcycle Units
Launched in 2014, Project Rushmore is a direct response to Polaris’s new Indian
touring bike line. Project Rushmore is a customer-driven line of bikes (Road
Glide, Classic Low, CVO) that offer more power, better breaks, and new design.
Harley has equipped these new bikes with a “High Output Engine” that delivers
5% more torque than standard bike engines. Responding to customer feedback,
Harley installed a new ABS break system in all Rushmore bikes and upgraded the
infotainment system to include a 6.5-in. high resolution screen capable of GPS
navigation. Project Rushmore is the direct result of customer interaction and
feedback, and is a consumer oriented initiative.
UOIG 3
University of Oregon Investment Group
Industry
Overview
Harley-Davidson U.S. Market Share
HOG
47.50%
52.50%
Other
Per Capita Disposable Income
Amount % Change
2014
37352
1.58%
2015
38305
2.55%
2016
39186
2.30%
2017
40294
2.83%
2018
41366
2.66%
2019
42312
2.29%
2020
43312
2.36%
Motorcycle Manufacturing Data Outlook
Year
Amount
2015
6960.7
0.70%
2016
7023.4
0.90%
2017
7093.6
1.00%
2018
7115.4
0.31%
2019
7215
1.40%
2020
7287.2
1.00%
% Change
Consumer Confidence
Year
Index
In a lower margin industry, companies manage labor costs by producing in foreign
countries. The recreational vehicle industry requires medium levels of capital
investment, with $0.15 per every dollar spent on wages invested in capital.
Motorcycle companies in particular invest a substantial amount in wages, as many
functions of production cannot be automated.
Raw materials costs for motorcycle production rests heavily on the prices of
metal. Particularly, the cost of steel affects the cost of production within the
recreational vehicles segment. As industrial production is anticipated to
accelerate, the world price of steel is expected to grow. A booming industrial
market breeds a high demand for steel, and as a result the price of steel is forecast
to grow at 1.9% in the next 5 years according to IBIS World.
Source: IBIS World
Year
Harley-Davidson falls under the umbrella of a Consumer Goods company, and is
placed in the Recreational Vehicles segment. The health of the recreational
vehicles segment has a unique correlation to the baby-boomer population. This
generation of Americans is a key target for motorcycle companies, as the
motorcycle is a cultural symbol representing a distinct lifestyle and holds a special
value. As the baby-boomers age, industry success depends largely on appealing
to a younger audience.
Abs. Change
2014
86.1
16.98%
2015
92.4
7.32%
2016
95.9
3.79%
2017
98
2.19%
2018
101.6
3.67%
2019
103.6
1.97%
2020
105
1.35%
Macro factors
Domestic Economic Health
The Consumer Goods industry waxes and wanes with the momentum of the U.S.
economy. Key external factors which were considered in UOIG projections are
motorcycle manufacturing data outlook, per capita disposable income, and
consumer confidence
Per capita disposable income, which determines the ability to purchase goods or
services, is expected to increase in the next year by 1.6% according to IBIS World.
This growth rate has room for improvement, as steady job growth will increase
consumer’s willingness to spend. The most recent jobs report provided promising
data, as the national unemployment rate declined to 5.6%. Further, Harley’s target
market of men 20 years and over has experienced consistent job growth over the
past year of 1.14%. This bodes well for the company as their strongest consumer
base becomes more financially secure.
Consumer confidence is an especially important measure to consider when
looking to invest in a consumer goods company. A strong consumer confidence
measurement bodes well for companies that offer products not considered to be
essential items. Consumers are less likely to purchase motorcycles during an
economic downturn, but are more willing to buy these non-essential products
when consumer sentiment is high. With this in mind, IBIS World projections
suggest consumer confidence will recover in stride with the economy and
employment. The 5-year projected CAGR for the consumer confidence index sits
at 3.8%. This strong rate is likely due to a downturn in unemployment and
plunging gas prices.
Foreign Exchange Headwinds
There is no denying the fact that Harley-Davidson’s plan for global expansion
could be shaken by a FX challenge. Currently, 35% of total revenue is generated
from international sales. Because the company’s major outreach targets are Brazil,
Japan, India, and Australia, major currency fluctuations within these regions could
have a substantial effect on revenues.
UOIG 4
University of Oregon Investment Group
Foreign Exchange Rates
FX
USD / Euro
USD / JPY
USD / CAD
2/2/2015
0.88
0.00854
0.79
However, HOG does hedge against currency risk on a rolling 12 month basis. This
time delay does not completely protect against the strengthening U.S. dollar, but
delays and spreads out risk across the year rather than incurring costs all at one
time. The company has shown a resiliency despite currency risk, and posted
strong margins in their most recent Q4 while in the midst of a financial storm in
Europe and Japan. While FX costs will no doubt hamper the company to some
degree in the coming year, I still expect margins to rise on improved cost cutting
efficiencies.
Competition
Within the motorcycle industry, competition is largely based on styling, price, and
quality of product. Harley-Davidson dominates the industry, and has since grown
stronger as Honda has ceased its U.S. motorcycle production. Polaris Industries
recent re-opening of the Indian motorcycle brand poses a notable competitive
threat to Harley-Davidson. However, to chip away at HOG’s strong market share,
Polaris must sway first time motorcycle customers away from the established
Harley offering.
Business Growth Strategies
HOG International Sales % of Revenue
International
2015E
2016E
2017E
2018E
2019E
2020E
99,146.41
102,120.80
105,184.43
108,339.96
111,590.16
114,937.86
% of Total
35.53%
35.75%
35.98%
36.22%
36.48%
36.79%
HOG Dealership Locations
Full Service
Dealership
U.S.
Canada
EMEA
Asia
Lain America
Total
696
69
371
271
51
1458
Non-Traditional
92
5
20
8
29
154
It is important to note that Harley-Davidson is in a transformational period.
Traditionally focusing their efforts on a core domestic demographic, the company
has implemented a new strategy focused on strengthening the Harley-Davidson
brand and targeting a whole new demographic. To spur growth, the company must
execute on two major plans; growing international sales at a faster rate than U.S.
sales, and capture a new domestic target demographic.
International Growth Opportunities
Already the leading company in motorcycle sales in the U.S., Harley recognizes
that a healthy international presence is the largest avenue for growth. A recent
Wells Fargo survey of European dealerships indicated positive trends in the
EMEA region. Harley-Davidson’s Rushmore bike line has experienced strong
traction with new European motorcycle riders. For the first time, Street bikes
began shipping into Northern Europe during Q4 2014, and will be introduced to
Japan, China, Australia, and Mexico in 2015. This fresh injection of lower priced
bikes will add to international sales and help increase HOG’s presence in these
new markets. The Street has been received particularly well in India, where the
750 model was named Motorcycle of the Year.
The company has demonstrated a history of delivering on their international sales
goals. For the fiscal year 2014, international sales of new bikes grew at more than
5%. Since 2009, Hog has added 136 new international dealer points. The goal is
to continue to expand on this already strong dealership presence.
New Target Demographic
Echoing industry trends, Harley-Davidson will increasingly focus on new target
demographics. The company’s core customer base are Caucasian men over the
age of 35, with a median household income of $90,800. The growing strength of
U.S. citizen purchasing power and increase in consumer spending has allowed the
company to broaden their demographic base.
Harley-Davidson has recently implemented a multi-generational and multicultural marketing strategy outside of the company’s core customer base. They
define this new target market as “outreach customers”. These outreach customers
UOIG 5
University of Oregon Investment Group
consist of women, young adults, African-American adults, and Latino adults.
Promisingly, the company reported that they were the market share leader in new
motorcycle registrations within their outreach customer segment. To reflect the
shifting marketing strategies, SG&A is projected to increase nominally yet
decrease as a percent of total revenue.
Keith Wandell Compensation
Management and Employee Relations
12,000,000.00
Keith Wandell – Chairman, President and Chief Executive
Officer
10,000,000.00
The first CEO to be recruited from outside the company since 1981, Mr. Wandell
is the leader behind HOG’s new target demographic strategy. Previous to joining
Harley-Davidson in 2009, Mr. Wandell served as COO of Johnson Controls, Inc.,
a global manufacturer of automotive and building solutions. The positive
momentum Mr. Wandell created at Johnson Controls has since carried over to
Harley-Davidson, and his passion for motorcycles makes him the right fit for
HOG.
8,000,000.00
6,000,000.00
4,000,000.00
2,000,000.00
1
Salary
Bonus
Stock Awards
Other
John Baker – General Manager, Corporate Strategy and
Business Development
Mr. Baker has been with Harley-Davidson for 18 years, and is currently
responsible for overseeing the long-range planning of the company’s global
expansion. Mr. Baker’s performance is increasingly important as the company
seeks to increase their global footprint. Mr. Baker holds a Master’s degree in
Business Administration from Marquette University.
Management Guidance
Management traditionally provides guidance on overall motorcycle shipments
and an estimate on the tax rate. The company expects to ship 282,000 to 287,000
motorcycle units in 2015 and suggests the tax rate to be 35.5%. Margins are
expected to be hampered in the coming year because of FX risk, but still remain
strong.
PII / HOG One Year Stock Performance
Portfolio Strategy
$180
Investing in Harley-Davidson takes a special consideration to the UOIG portfolio
strategy. The UOIG currently holds shares of Polaris Industries in both Tall Firs
and Svigals portfolios. Holding both Polaris and Harley-Davidson could expose
the group to too much investment risk, as the success of one of these companies
often comes at the expense of the other.
$160
$140
$120
$100
However, Polaris offers a more diverse list of products, and does not operate
wholly in the motorcycle space. In comparison, Harley-Davidson relies primarily
on the success of the overall motorcycle market to generate revenue. I believe this
consumer space is poised for steady growth, and that HOG is in the best position
to capitalize on market momentum.
$80
$60
$40
PII
HOG
Polaris has delivered consistent performance since our original investment, and
still holds tremendous upside. However, to capture the most growth in the
recreational vehicles space, an investment in HOG for only our DADCO portfolio
would allow the group to recognize investment upside without exposing our other
two portfolios to any risk. Holding both Polaris and Harley-Davidson in Tall Firs
UOIG 6
University of Oregon Investment Group
and Svigals portfolios would be a counterproductive strategy, as a measure of
correlation between both equities is close to 1.
Recent News
Harley Davidson Delivers Strong Full Year 2014 Financial Performance
Jan. 29, 2015 – PRNewswire
HOG Fiscal Year 2014 vs 2013 Figures
Revenue
$6.23 B
5.6% +
Net Income
$844.6 M
15.1% +
EPS
$3.88
18.3% +
HOG reported full-year EPS increased by 18.3% to $3.88, worldwide sales of
47,149 new motorcycles, and strong demand in international markets. The news
delivered a promising outlook on traction with the company’s new outreach
market.
Harley-Davidson Partners with Wounded Warrior Project
Nov. 6, 2014 – PRNewswire
Demonstrating a commitment to U.S. veterans, Harley-Davidson made a special
delivery of new 2015 motorcycles to 6 military veterans. The gifts are the start of
a new partnership with the Wounded Warrior Project. The partnership is intended
to help veterans experience the positive benefits of peer-to-peer activities like
motorcycle riding, which has been found to help combat PTSD.
Catalysts
Upside
Trade-weighted Index Projections
6.00%


5.00%

Successful release of 2015 motorcycle lineup will drive sales growth
Traction in international markets will add to already strong market share
and aid cash flow growth
Successful cost reduction strategies will provide the company with more
free cash flows and higher margins
4.00%
Downside
3.00%


2.00%
1.00%

Prolonged foreign currency exchange headwinds could hamper margins
Severe downturn in global economic health would decrease consumer
demand of motorcycles
Poor weather in important markets would harm dealership sales
0.00%
2012
2013
2014
2015
2016
2017
Comparable Analysis
Two basic approaches were used in screening for comparable companies. First a
holistic approach was used to consider what sort of companies investors might
look at when determining how to invest in the recreational vehicles space.
Companies offering motorcycles as a substantial part of their overall revenue
scheme were considered first. Because HOG has a notable international foothold,
companies that operated multi-nationally were chosen. During the second stage
of screening, companies with similar Beta, revenue growth expectations, and Net
Margins were considered.
UOIG 7
University of Oregon Investment Group
Polaris Industries Inc. (PII) - 60%
“Polaris Industries Inc., together with its subsidiaries, designs, engineers,
manufactures, and markets off-road vehicles, snowmobiles, motorcycles, and
small vehicles in the United States, Canada, and Western Europe. The company
was founded in 1987 and is headquartered in Medina, Minnesota.” – Yahoo!
Finance
HOG vs PII Motorcycle Model Price Spread
$40,000
$35,000
$30,000
PII was awarded a 60% weighting based on its close competition with Harley on
the motorcycle front and its similar growth rates and margins. Both companies are
subject to consumer spending and have international connections. Unlike HOG,
Polaris offers more than just a motorcycle line. However, their Indian motorcycle
brand is Harley’s largest competitive threat. Turning to multiples, HOG is trading
at a discount when considering EV/EBITDA and PE. Although not weighted, the
PEG ratio displays an undervaluation, even as Polaris has experienced a stage of
rapid growth.
$25,000
$20,000
$15,000
$10,000
$5,000
$1
2
3
Indian Price
4
5
6
7
Bombardier Inc. (Doo.TO) – 30%
“BRP Inc., together with its subsidiaries, designs, develops, manufactures,
distributes, and markets powersports vehicles and propulsion systems. The
company sells its products through a network of dealers and distributors, as well
as to original equipment manufacturers worldwide. BRP Inc. is headquartered in
Valcourt, Canada.”
HOG Price
BRP was the second best comparable company to HOG. The company was given
a 30% weighting due to their similarity in product offerings to Polaris and
competition with HOG in the tri-wheeled bike segment.
Honda Motor Co., Ltd. (HMC) – 10%
“Honda Motor Co., Ltd. manufactures and sells motorcycles, automobiles, and
power products. It operates through four segments: Motorcycle Business,
Automobile Business, Financial Services Business, and Power Product and Other
Businesses. The Motorcycle Business segment offers business and commuter
models, as well as sports models. The company sells its products through
independent retail dealers, outlets, and authorized dealerships primarily in Japan,
North America, Europe, and rest of Asia. Honda Motor Co., Ltd. was founded in
1946 and is based in Tokyo, Japan.”
HOG vs HMC Yearly EPS
2014
2013
2012
2011
2010
$0.75
$1.50
$2.25
HOG EPS
$3.00
HMC EPS
$3.75
$4.50
HMC is the most similar to HOG from a qualitative standpoint. An established
company, HMC also relies on independent retail dealers to sell their products.
However, the company is more diversified from a product offering standpoint,
producing more than just motorcycles. This broad product offering hampers the
company’s margins, making them much slimmer than HOG’s. Due to the margin
discrepancy, HMC was only given a 10% weighting.
General Motors Company (GM) – 0%
“General Motors Company (GM) designs, manufactures, and markets cars,
crossovers, trucks, and automobile parts worldwide. The company markets its
vehicles primarily under the Buick, Cadillac, Chevrolet, GMC, Opel, Holden, and
Vauxhall brand names, as well as under the Alpheon, Jiefang, Baojun, and Wuling
brand names. The company, through its subsidiary, General Motors Financial
Company, Inc. provides automotive financing services and lease products through
GM dealerships in connection with the sale of used and new automobiles that
target customers with sub-prime and prime credit bureau scores. The company
was founded in 1908 and is based in Detroit, Michigan.” – Yahoo! Finance
UOIG 8
University of Oregon Investment Group
General Motors was not weighted at all because of their much slimmer profit
margins and massive size. However, I felt it important to include as investors
looking at the consumer goods space might possibly look to car companies as an
option.
Discounted Cash Flow Analysis
Revenue Model
Motorcycles & Related Revenue
$9,000.0
$8,000.0
$7,000.0
To project revenues, the model was initially broken down into two operating
segments: Motorcycles & Related Products and Financial Services. Within the
Motorcycles & Related Products segment, further line items were broken out to
capture revenue generated by motorcycles, parts and accessories, general
merchandise, and other. Because motorcycle shipments consist of nearly 80% of
the company’s total revenue, this section was by far the most important for
projections.
United States Motorcycle Sales
To project motorcycle sales, the first step was to map out motorcycle unit
shipments. With economic considerations in mind, a blend of growth rate
projections for disposable income, motorcycle manufacturing data outlook, and
consumer confidence were used as the base growth rate for domestic motorcycle
unit shipments. Disposable income and motorcycle manufacturing growth rates
were weighted 40% each in a weighted average method. Consumer Confidence
growth rate projections were only given a 20% weighting because of the large
swings in absolute change. This blended rate served as my domestic Motorcycle
Unit sales growth rate.
$6,000.0
$5,000.0
$4,000.0
$3,000.0
$2,000.0
$1,000.0
$0.0
Next, the prices of each Harley-Davidson motorcycle was compiled and arranged
in order from lowest price to high. The prices were further categorized under
Touring, Custom, and Sportster. A weighted average of the prices was then taken
and multiplied by the projected unit shipments to get total domestic motorcycle
sales. Because Touring and Custom bikes generate the largest portion of bike
sales, they were both assigned 40% weightings.
HOG International Sales % of Revenue
Motorcycle Model Sales
Since consumer preferences are ever changing, projections of each motorcycle
type were done off a percentage of total motorcycle revenue. Harley-Davidson’s
Touring motorcycles have historically been the strongest brand and easiest for
dealers to sell. With the addition of Project Rushmore bikes, touring is expected
to maintain above 40% of total revenue.
38.50%
38.00%
37.50%
37.00%
36.50%
Going forward, Sportster models are expected to increase as a percentage of total
revenue as the company will begin to market these bikes more aggressively to the
outreach demographics. The cheaper price points and fresh feel of these bikes
make them attractive purchases for a younger generation, and are expected to
represent 25% of total revenue in 2023.
36.00%
35.50%
35.00%
34.50%
Due to a broad exposure to various international markets, the International
motorcycle segment is kept at a 3% growth rate. The 3% projected rate is
conservative at best, but should be considered the base case for segment the
company is increasingly focused on.
34.00%
Financial Services Segment
As credit markets tighten, the Financial Services is projected to grow slowly in
the coming years. However, changes in the overall availability of credit could spur
growth in this segment in the coming years.
UOIG 9
University of Oregon Investment Group
Other Assumptions
Inventory
Breaking the trend of all other Working Capital line items, I project day sales
outstanding for inventory to decrease significantly. The company has admitted
poor inventory management over the past few years and highlights it as an area to
improve on. The company has experienced higher than desired levels of
inventory, especially during slow sales seasons. To combat this, Harley-Davidson
has implemented a new surge manufacturing process. Their new production plant
in York, PA operates on a rolling time frame; hiring more temporary work in the
off-seasons to produce small amounts and then ramping up their employee base
during peak seasons to meet demand.
Source: UOIG Figures
Type
1 Year Daily
3 Year Weekly
Hamada Comps
5 Year Weekly
Hamada ETF
3 Year Daily
5 Year Daily
Vasicek Comps
Vasicek ETF
HOG Beta
Beta SE Weighting
1.18 0.10
0.00%
1.12 0.14
0.00%
0.91
5.00%
1.54 0.09
5.00%
1.03
10.00%
1.25 0.06
15.00%
1.42 0.04
20.00%
0.98 0.03
20.00%
1.04 0.02
25.00%
1.15
Because the company’s York, PA plant was built specifically to address inventory
levels, I project day sales outstanding to decrease and inventory levels to
normalize.
Cost of Goods Sold
Steel is the primary raw materials input and is used in every bike. Harley has
benefitted in the past two years off of lower than average cost of steel. To project,
future growth rate projections for the cost of steel was used as a foundation to
project cost of goods sold.
Beta
Beta was derived by a series of regressions against the S&P 500. The 3 year daily,
5 year daily, and 5 year weekly had the smallest standard error and were thus
weighted appropriately. To capture industry volatility, a blended comp beta and
consumer goods ETF beta calculation were used and weighted substantially.
Recommendation
Harley-Davidson is the recognized leader in the motorcycle industry. With
leading market share in the U.S. and Europe and Japan, the company is poised to
capitalize from a growth in the overall motorcycle market. The company has
consistently delivered favorable financial performance, and with cost cutting
strategies in place will continue to improve on strong margins. With such strong
FCF, I expect the company to utilize excess cash in the form of buybacks
benefiting the stock price. I assign HOG an Outperform rating and a buy for
DADCO portfolio.
Method
Final Price Target
DCF
Comparable Analysis
Weighting
80.03
72.50
Price Target
Current Price
Undervalued
70.00%
30.00%
77.77
61.68
26.09%
UOIG 10
University of Oregon Investment Group
Appendix 1 – Relative Valuation
Comparables Analysis
HOG
PII
Harley-Davidson,
Polaris
Inc.
Industries Inc.
($ in millions)
Stock Characteristics
Current Price
Beta
Max
$144.15
1.22
Min
$22.07
0.50
Size
Short-Term Debt
Long-Term Debt
Cash and Cash Equivalent
Non-Controlling Interest
Preferred Stock
Diluted Basic Shares
Market Capitalization
Enterprise Value
25,467.5
31,402.8
30,240.0
1,887.8
3,109.0
1,802.3
56,934.5
127,248.8
2.5
5.7
(979.9)
0.0
0.0
68.2
2,502.7
2,603.0
7,087.5
11,124.3
5,846.9
283.5
0.0
894.7
32,663.8
66,340.7
Growth Expectations
% Revenue Growth 2015E
% Revenue Growth 2016E
% EBITDA Growth 2015E
% EBITDA Growth 2016E
% EPS Growth 2015E
% EPS Growth 2016E
12.99%
9.51%
37.30%
14.50%
63.80%
17.11%
2.20%
3.46%
13.56%
0.56%
13.16%
-0.62%
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
52.47%
28.94%
31.06%
18.02%
Credit Metrics
Interest Expense
Debt/EV
Leverage Ratio
Interest Coverage Ratio
Operating Results
Revenue
Gross Profit
EBIT
EBITDA
Net Income
Capital Expenditures
Multiples
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
PEG
Multiple
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Price Earnings/ Growth
Price Target
Current Price
Undervalued
Median
Weight Avg.
$32.35
$96.27
0.94
0.96
DOO-CA
BRP, Inc.
HMC
Honda Motor
Co.
GM
General Motors
Company
$61.68
1.15
60.00%
$144.15
1.22
30.00%
$22.07
0.50
10.00%
$31.59
0.78
0.00%
$33.11
1.10
2,553.3
3,276.2
1,261.5
188.8
0.0
255.2
12,345.4
19,625.1
352.4
3,573.1
(979.9)
0.0
0.0
220.1
14,435.4
19,340.8
2.5
223.6
137.6
0.0
0.0
68.2
9,835.2
10,199.0
16.9
5.7
77.6
0.0
0.0
113.4
2,502.7
2,603.0
25,467.5
31,402.8
11,556.3
1,887.8
0.0
1,802.3
56,934.5
127,248.8
14,158.0
22,025.0
30,240.0
567.0
3,109.0
1,676.0
55,492.4
122,482.4
7.30%
5.63%
16.37%
10.90%
18.03%
13.89%
9.64%
8.03%
14.49%
13.38%
15.02%
16.17%
12.99%
6.07%
29.36%
0.56%
38.68%
-0.62%
11.80%
9.51%
13.56%
14.50%
13.16%
17.11%
5.50%
6.00%
15.40%
12.50%
17.60%
15.60%
9.10%
5.26%
17.34%
9.29%
18.46%
12.18%
2.20%
3.46%
37.30%
3.20%
63.80%
7.00%
15.79%
5.76%
9.80%
4.79%
26.69%
7.30%
11.49%
5.48%
28.56%
12.73%
16.76%
8.73%
52.47%
28.94%
31.06%
18.02%
30.08%
16.27%
19.89%
10.86%
25.90%
7.53%
12.61%
5.61%
27.49%
7.07%
10.38%
5.34%
15.79%
5.76%
9.80%
4.79%
$0.00
0.45
4.47
0.00
$0.00
0.02
0.05
0.00
$0.00
0.32
1.30
0.00
$0.00
0.16
0.59
0.00
$0.00
0.20
1.80
0.00
$0.00
0.02
0.21
0.00
$0.00
0.35
0.05
0.00
$0.00
0.45
4.47
0.00
$0.00
0.30
2.40
0.00
$153,807.0
$33,666.7
$8,859.0
$15,078.0
$7,368.0
$8,044.0
$3,687.0
$955.0
$277.5
$465.0
$207.0
$169.0
$63,983.8
$12,965.2
$4,776.8
$6,900.3
$3,570.0
$2,796.6
$16,645.1
$4,642.8
$1,484.8
$2,065.1
$1,073.8
$707.4
$7,037.4
$3,692.8
$2,036.8
$2,186.1
$1,268.3
$250.0
$5,484.4
$1,649.5
$892.4
$1,091.0
$595.5
$194.7
$3,687.0
$955.0
$277.5
$465.0
$207.0
$169.0
$122,483.2
$33,666.7
$8,661.2
$12,709.5
$6,544.6
$5,398.4
$153,807.0
$24,281.0
$8,859.0
$15,078.0
$7,368.0
$8,044.0
2.7x
6.2x
14.7x
10.0x
17.4x
16.5x
1.3x
0.7x
2.7x
9.4x
5.6x
8.8x
7.5x
0.1x
0.9x
4.4x
12.6x
8.7x
14.4x
10.4x
0.6x
1.4x
4.9x
11.1x
8.3x
11.2x
14.4x
1.0x
2.7x
5.2x
9.5x
8.8x
10.0x
11.4x
0.3x
1.9x
6.2x
11.4x
9.3x
11.4x
16.5x
1.3x
0.7x
2.7x
9.4x
5.6x
8.8x
12.1x
0.7x
1.0x
3.8x
14.7x
10.0x
17.4x
8.7x
0.5x
0.8x
5.0x
13.8x
8.1x
17.4x
7.5x
0.1x
Implied Price
Weight
23.49
60.03
80.83
60.06
40.00%
76.30
20.00%
83.04
40.00%
224.38
$72.50
61.68
17.54%
University of Oregon Investment Group
Appendix 2 – Discounted Cash Flows Valuation
Discounted Cash Flow Analysis
($ in millions)
Q1
2010A
2011A
2012A
2013A
Q2
03/31/2014 A
Q3
06/31/2014 A
Q4
09/31/2014A
12/31/2014A
2014A
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
Total Revenue
4859.3
5311.7
5580.5
5899.9
1726.0
2000.7
1301.6
1200.2
6228.5
7037.4
7464.2
7648.3
7834.1
8021.1
8199.0
8375.0
8541.9
8703.5
% YoY Growth
0.00%
9.31%
5.06%
5.72%
22.05%
11.50%
10.55%
.80%
5.57%
12.99%
6.07%
2.47%
2.43%
2.39%
2.22%
2.15%
1.99%
1.89%
Cost of Goods Sold Excluding D&A
% Change
% Revenue
2494.1
2925.9
3053.4
3228.8
936.2
1023.0
605.3
624.1
3188.5
3344.6
3679.0
3993.4
4472.3
4606.5
4427.4
4438.7
4441.8
4438.8
(6.05%)
17.31%
4.36%
5.75%
(71.01%)
9.28%
(40.84%)
3.11%
(1.25%)
4.89%
10.00%
8.55%
11.99%
3.00%
2.00%
0.26%
0.07%
(.07%)
51.32%
55.08%
54.72%
54.73%
54.24%
51.13%
46.50%
52.00%
51.19%
47.53%
49.29%
52.21%
57.09%
57.43%
54.00%
53.00%
52.00%
51.00%
Gross Profit
$2,365.3
$2,385.8
$2,527.1
$2,671.0
$789.9
$977.7
$696.3
$576.1
$3,040.0
$3,692.8
$3,785.2
$3,654.9
$3,361.8
$3,414.7
$3,771.5
$3,936.2
$4,100.1
$4,264.7
Gross Margin
48.68%
44.92%
45.28%
45.27%
45.76%
48.87%
53.50%
48.00%
48.81%
52.47%
50.71%
47.79%
42.91%
42.57%
46.00%
47.00%
48.00%
49.00%
272.5
229.5
196.0
165.5
38.9
40.7
40.1
36.0
155.7
175.9
186.6
191.2
195.9
176.5
164.0
180.1
192.2
200.2
5.61%
4.32%
3.51%
2.80%
2.25%
2.04%
3.08%
3.00%
2.50%
2.50%
2.50%
2.50%
2.50%
2.20%
2.00%
2.15%
2.25%
2.30%
Financial Services Interest Expense
% Revenue
Depreciation and Amortization
% Beginning PP&E
Financial Services Provision for Credit Loss
% Revenue
Selling, Administrative and Engineering
% Revenue
Restructuring (benefit) expense and Asset Impairment
% Revenue
Earnings Before Interest & Taxes
% Revenue
Investment (Income)
% Revenue
Interest Expense
% Revenue
Income from Discontinued Operations net of Tax
% Revenue
Other Expenses (Income)
% Revenue
Earnings Before Taxes
255.2
180.4
169.0
167.1
43.4
87.1
130.7
23.6
284.8
149.4
169.5
178.1
186.9
191.0
192.9
203.5
213.1
220.0
28.14%
21.93%
20.33%
19.63%
4.86%
9.96%
14.98%
3.00%
34.75%
20.00%
20.00%
20.00%
20.00%
20.00%
20.00%
20.00%
20.00%
20.00%
93.1
17.0
22.2
60.0
20.3
16.0
21.5
18.0
75.8
64.0
67.9
69.6
71.3
73.0
74.6
76.2
77.7
79.2
1.92%
.32%
.40%
1.02%
1.18%
.80%
1.65%
1.50%
1.22%
.91%
.91%
.91%
.91%
.91%
.91%
.91%
.91%
.91%
1020.4
1060.9
1111.2
1126.9
276.4
286.2
279.9
276.0
1118.5
1266.7
1332.4
1365.2
1394.5
1423.7
1453.7
1481.5
1507.6
1531.8
21.00%
19.97%
19.91%
19.10%
16.01%
14.30%
21.51%
23.00%
17.96%
18.00%
17.85%
17.85%
17.80%
17.75%
17.73%
17.69%
17.65%
17.60%
163.5
68.0
28.5
-2.1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3.36%
1.28%
0.51%
-0.04%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$560.6
$830.0
$1,000.2
$1,153.7
$410.9
$547.7
$224.1
$222.4
$1,405.1
$2,036.8
$2,028.8
$1,850.7
$1,513.3
$1,550.4
$1,886.3
$1,994.9
$2,109.5
$2,233.5
11.54%
15.63%
17.92%
19.55%
23.80%
27.38%
17.22%
18.53%
22.56%
28.94%
27.18%
24.20%
19.32%
19.33%
23.01%
23.82%
24.70%
25.66%
(5.44)
(7.96)
(7.37)
(5.86)
(1.66)
(1.77)
(1.51)
(1.56)
(6.50)
-
-
-
-
-
-
-
-
-
(.11%)
(.15%)
(.13%)
(.10%)
(.10%)
(.09%)
(.12%)
(.13%)
(.10%)
-
-
-
-
-
-
-
-
-
90.4
45.3
46.0
45.3
3.7
0.4
0.1
0.0
4.2
70.4
74.6
76.5
78.3
80.2
82.0
83.7
85.4
87.0
1.86%
.93%
.95%
.93%
.08%
.01%
.00%
.01%
.09%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
85.2
51.0
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1.75%
1.05%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
113.1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2.33%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
277.3
792.7
961.5
1114.3
408.9
549.1
225.7
224.0
1407.4
1966.4
1954.2
1774.2
1435.0
1470.2
1804.4
1911.2
2024.0
2146.5
% Revenue
5.71%
14.92%
17.23%
18.89%
23.69%
27.44%
17.34%
18.66%
22.60%
27.94%
26.18%
23.20%
18.32%
18.33%
22.01%
22.82%
23.70%
24.66%
Less Taxes (Benefits)
Tax Rate
130.8
47.16%
244.6
30.86%
337.6
35.11%
380.3
34.13%
142.9
34.96%
194.9
35.50%
75.4
33.43%
79.5
35.50%
492.8
35.02%
698.1
35.50%
693.7
35.50%
629.8
35.50%
509.4
35.50%
521.9
35.50%
640.5
35.50%
678.5
35.50%
718.5
35.50%
762.0
35.50%
Net Income
$146.5
$599.1
$623.9
$734.0
$265.9
$354.2
$150.2
$144.5
$914.6
$1,268.3
$1,260.5
$1,144.4
$925.6
$948.3
$1,163.8
$1,232.7
$1,305.5
$1,384.5
Net Margin
3.02%
11.28%
11.18%
12.44%
15.41%
17.70%
11.54%
12.04%
14.68%
18.02%
16.89%
14.96%
11.81%
11.82%
14.19%
14.72%
15.28%
15.91%
Add Back: Depreciation and Amortization
255.2
180.4
169.0
167.1
43.4
87.1
130.7
23.6
284.8
149.4
169.5
178.1
186.9
191.0
192.9
203.5
213.1
220.0
Add Back: Interest Expense*(1-Tax Rate)
47.7
31.3
29.9
29.8
2.4
0.3
0.1
0.0
2.7
45.4
48.1
49.3
50.5
51.7
52.9
54.0
55.1
56.1
$449.5
$810.8
$822.8
$930.9
$311.7
$441.5
$281.0
$168.1
$1,202.1
$1,463.1
$1,478.1
$1,371.8
$1,163.0
$1,191.0
$1,409.6
$1,490.2
$1,573.7
$1,660.6
9.25%
15.26%
14.74%
15.78%
18.06%
22.07%
21.59%
14.01%
19.30%
20.79%
19.80%
17.94%
14.84%
14.85%
17.19%
17.79%
18.42%
19.08%
1916.7
2040.4
2659.2
2678.4
3213.8
3161.9
3022.7
2937.6
2937.6
2961.6
3118.0
3213.4
3286.8
3344.4
3397.0
3452.8
3517.8
3532.9
% Revenue
39.44%
38.41%
47.65%
45.40%
186.20%
158.04%
232.23%
244.77%
47.16%
42.08%
41.77%
42.01%
41.95%
41.70%
41.43%
41.23%
41.18%
40.59%
Current Liabilities
% Revenue
2013.8
41.44%
2058.3
38.75%
1503.4
26.94%
2509.6
42.54%
2844.1
164.78%
2453.6
122.64%
2707.0
207.98%
2858.9
238.21%
2858.9
45.90%
2263.8
32.17%
2212.9
29.65%
2208.7
28.88%
2762.4
35.26%
2622.1
32.69%
2664.6
32.50%
2737.8
32.69%
2768.9
32.42%
2773.6
31.87%
Operating Cash Flow
% Revenue
Current Assets
Net Working Capital
% Revenue
($97.1)
($17.9)
$1,155.7
$168.8
$369.7
$708.2
$315.7
$78.7
$78.7
$697.8
$905.1
$1,004.7
$524.3
$722.3
$732.4
$715.0
$748.9
$759.3
(2.00%)
(.34%)
20.71%
2.86%
21.42%
35.40%
24.25%
6.56%
1.26%
9.91%
12.13%
13.14%
6.69%
9.01%
8.93%
8.54%
8.77%
8.72%
79.2
1173.6
-986.9
200.9
338.5
-392.5
-237.0
-90.1
619.0
207.4
99.6
-480.4
198.0
10.1
-17.4
33.9
10.4
170.8
189.0
189.0
208.3
25.9
84.5
45.8
55.8
212.0
250.0
212.7
221.8
207.6
200.5
246.0
251.2
247.7
248.0
3.52%
3.56%
3.39%
3.53%
1.50%
4.22%
3.52%
4.65%
3.40%
3.55%
2.85%
2.90%
2.65%
2.50%
3.00%
3.00%
2.90%
2.85%
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
$278.6
$542.6
-$539.9
$1,709.5
$84.9
$18.5
$627.7
$349.2
$1,080.2
$594.0
$1,058.0
$1,050.4
$1,435.8
$792.5
$1,153.6
$1,256.4
$1,292.1
$1,402.2
$548.6
$902.2
$827.2
$1,044.1
$532.2
$715.3
$719.4
$683.2
$684.7
Change in Working Capital
Capital Expenditures
% Revenue
Acquisitions
% Revenue
Unlevered Free Cash Flow
Discounted Free Cash Flow
UOIG 12
University of Oregon Investment Group
Appendix 3 – Revenue Model
Revenue
($ in millions)
Motorcycles & Related Products
Q1
2010A
2011A
2012A
2013A
Q2
Q3
Q4
03/31/2014 A 06/31/2014 A 09/31/2014A 12/31/2014A
2014A
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
$4,176.6
$4,662.3
$4,942.6
$5,258.3
$1,571.7
$1,834.3
$1,130.6
$1,031.2
$5,567.7
$6,350.5
$6,763.4
$6,933.6
$7,105.7
$7,279.1
$7,445.0
$7,609.7
$7,765.9
% Growth
(2.58%)
11.63%
6.01%
6.39%
11.13%
12.43%
(4.21%)
(.11%)
5.88%
14.06%
6.50%
2.52%
2.48%
2.44%
2.28%
2.21%
2.05%
1.95%
% of Total Revenue
85.95%
87.77%
88.57%
89.13%
91.06%
91.68%
86.86%
85.92%
89.39%
90.24%
90.61%
90.66%
90.70%
90.75%
90.80%
90.86%
90.92%
90.96%
Financial Services
% Growth
$7,917.0
$682.7
$649.4
$637.9
$641.6
$154.4
$166.4
$171.0
$169.0
$660.8
$686.8
$700.8
$714.6
$728.4
$742.0
$754.0
$765.3
$776.0
$786.5
37.98%
(4.87%)
(1.77%)
.57%
(1.66%)
2.19%
4.66%
6.74%
3.00%
3.94%
2.04%
1.97%
1.92%
1.87%
1.62%
1.50%
1.40%
1.35%
% of Total Revenue
14.05%
12.23%
11.43%
10.87%
8.94%
8.32%
13.14%
14.08%
10.61%
9.76%
9.39%
9.34%
9.30%
9.25%
9.20%
9.14%
9.08%
9.04%
Total Revenue
$4,859.3
$5,311.7
$5,580.5
$5,899.9
$1,726.0
$2,000.7
$1,301.6
$1,200.2
$6,228.5
$7,037.4
$7,464.2
$7,648.3
$7,834.1
$8,021.1
$8,199.0
$8,375.0
$8,541.9
$8,703.5
9.31%
5.06%
5.72%
22.05%
11.50%
10.55%
.80%
5.57%
12.99%
6.07%
2.47%
2.43%
2.39%
2.22%
2.15%
1.99%
1.89%
% Growth
Revenue Model Motorcycle Segment
($ in millions)
Motorcycles
Q1
2010A
2011A
2012A
2013A
Q2
03/31/2014 A
Q3
Q4
06/31/2014 A 09/31/2014A 12/31/2014A
2014A
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
3317.0
3554.5
3764.8
4067.5
1305.0
1480.9
815.4
784.5
4385.9
5152.2
5529.5
5658.8
5789.5
5921.4
6047.0
6171.0
6294.1
6414.1
4.48%
7.16%
5.91%
8.04%
13.11%
16.17%
(4.86%)
.35%
7.83%
15.62%
7.32%
2.34%
2.31%
2.28%
2.12%
2.05%
1.99%
1.91%
% of Total Revenue
76.14%
76.04%
76.17%
77.35%
83.03%
80.74%
72.12%
76.08%
78.77%
81.13%
81.76%
81.61%
81.48%
81.35%
81.22%
81.09%
81.05%
81.02%
Parts & Accessories
749.2
816.6
859.9
873.1
198.1
271.6
239.7
165.6
875.0
888.1
914.7
945.5
976.7
1008.0
1038.2
1068.9
1098.3
1125.7
% Growth
(2.35%)
8.99%
5.31%
1.53%
7.66%
.74%
(4.17%)
(2.19%)
.22%
1.00%
3.00%
3.37%
3.30%
3.20%
3.00%
2.95%
2.75%
2.50%
% of Total Revenue
17.20%
17.47%
17.40%
16.60%
12.61%
14.81%
21.20%
16.06%
15.72%
13.98%
13.52%
13.64%
13.75%
13.85%
13.95%
14.05%
14.14%
14.22%
259.1
274.1
299.4
295.9
64.1
76.4
69.3
75.0
284.8
289.0
297.7
307.7
317.7
327.7
337.5
347.3
350.8
354.3
(8.18%)
5.79%
9.22%
(1.19%)
(11.13%)
(6.50%)
4.76%
(1.10%)
(3.73%)
1.00%
3.00%
3.35%
3.25%
3.15%
3.00%
2.90%
1.00%
1.00%
5.95%
5.86%
6.06%
5.63%
4.08%
4.16%
6.13%
7.28%
5.12%
4.55%
4.40%
4.44%
4.47%
4.50%
4.53%
4.56%
4.52%
4.47%
15.0
17.0
18.4
21.9
4.4
5.4
6.2
6.0
22.0
21.2
21.4
21.6
21.9
22.1
22.3
22.5
22.7
23.0
(8.12%)
13.53%
8.32%
18.50%
3.80%
2.21%
(11.45%)
12.00%
.56%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
.34%
.36%
.37%
.42%
.28%
.30%
.55%
.58%
.39%
.33%
.32%
.31%
.31%
.30%
.30%
.30%
.29%
.29%
16.3
12.6
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(65.00%)
(22.85%)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
% Growth
General Merchandise
% Growth
% of Total Revenue
Other
% Growth
% of Total Revenue
Buell Motorcycles
% Growth
% of Total Revenue
Total Revenue
% Growth
.37%
.27%
$4,356.6
$4,674.8
7.30%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$4,942.6
5.73%
$5,258.3
6.39%
$1,571.7
11.13%
$1,834.3
12.43%
$1,130.6
(3.97%)
$1,031.2
7.13%
$5,567.7
5.88%
$6,350.5
14.06%
$6,763.4
6.50%
$6,933.6
2.52%
$7,105.7
2.48%
$7,279.1
2.44%
$7,445.0
2.28%
$7,609.7
2.21%
$7,765.9
2.05%
$7,917.0
1.95%
UOIG 13
University of Oregon Investment Group
Appendix 4 – Revenue Model Continued
Motorcycle Unit Shipments in Thousands
2011A 2012A
United States
152180
160477
167016
175059
179898
183564
187178
190775
194340
197480
200442
203248
205789
% Change
15.61%
5.45%
4.07%
4.82%
2.76%
2.04%
1.97%
1.92%
1.87%
1.62%
1.50%
1.40%
1.25%
% Of Total
65.28%
64.81%
64.12%
64.52%
64.47%
64.25%
64.02%
63.78%
63.52%
63.21%
62.87%
62.50%
62.10%
80937
87148
93455
96259
99146
102121
105184
108340
111590
114938
118386
121938
125596
% Change
2.60%
7.67%
7.24%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
% Of Total
34.72%
35.19%
35.88%
35.48%
35.53%
35.75%
35.98%
36.22%
36.48%
36.79%
37.13%
37.50%
37.90%
Total Motorcycle Units
233117
247625
260471
271318
279044
285685
292362
299115
305930
312418
318828
325186
331385
% Change
10.70%
6.22%
5.19%
4.16%
2.85%
2.38%
2.34%
2.31%
2.28%
2.12%
2.05%
1.99%
1.91%
92002
99496
107213
111240
106037
107132
111098
116655
122372
129653
133908
139830
142495
International
Touring Motorcycle Units
2013A
2014A
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
% Change
12.30%
8.15%
7.76%
3.76%
-4.68%
1.03%
3.70%
5.00%
4.90%
5.95%
3.28%
4.42%
1.91%
% Of Total
39.47%
40.18%
41.16%
41.00%
38.00%
37.50%
38.00%
39.00%
40.00%
41.50%
42.00%
43.00%
43.00%
91459
96425
102950
108527
122780
122844
122792
119646
116253
110908
108402
104059
106043
Custom Motorcycle Units
% Change
4.90%
5.43%
6.77%
5.42%
13.13%
0.05%
-0.04%
-2.56%
-2.84%
-4.60%
-2.26%
-4.01%
1.91%
% Of Total
39.23%
38.94%
39.52%
40.00%
44.00%
43.00%
42.00%
40.00%
38.00%
35.50%
34.00%
32.00%
32.00%
Sportster Motorcycle Units
49656
51704
50308
51550
50228
55709
58472
62814
67305
71856
76519
81296
82846
% Change
19.90%
4.12%
-2.70%
2.47%
-2.57%
10.91%
4.96%
7.43%
7.15%
6.76%
6.49%
6.24%
1.91%
% Of Total
21.30%
20.88%
19.31%
19.00%
18.00%
19.50%
20.00%
21.00%
22.00%
23.00%
24.00%
25.00%
25.00%
Total Motorcycle Units
233117
247625
260471
271318
279044
285685
292362
299115
305930
312418
318828
325186
331385
% Change
10.70%
6.22%
5.19%
4.16%
2.85%
2.38%
2.34%
2.31%
2.28%
2.12%
2.05%
1.99%
1.91%
UOIG 14
University of Oregon Investment Group
Appendix 5 – Working Capital Model
Working Capital Model
($ in millions)
Total Revenue
Current Assets
Accounts Receivable
Days Sales Outstanding A/R
% of Revenue
Finance Receivable
Days Sales Outstanding A/R
% of Revenue
Inventory
Days Inventory Outstanding
% of Revenue
Deferred Income Taxes
Days Prepaid Expense Outstanding
% of Revenue
Other Assets
Days COGS Outstanding
% of Revenue
Total Current Assets
% of Revenue
Long Term Assets
Net PP&E Beginning
Capital Expenditures
Acquisitions
Depreciation and Amortization
Net PP&E Ending
Total Current Assets & Net PP&E
% of Revenue
Current Liabilities
Accounts Payable
Days Payable Outstanding
% of Revenue
Accrued Liabilities
Days Charges Outstanding
% of Revenue
Short Term Debt
Days Taxes Outstanding
% of Revenue
Current Portion of Long Term Debt
% of Revenue
Total Current Liabilities
% of Revenue
2010A
2011A
2012A
$4,859.34 $5,311.71 $5,580.50
2013A
Q1
Q2
Q3
Q4
03/31/2014 A
06/31/2014 A
09/31/2014A
12/31/2014A
$5,899.87
$1,726.05
$2,000.70
$1,301.60
2014A
$1,200.16 $6,228.51
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
$7,037.37 $7,464.21 $7,648.27 $7,834.12 $8,021.11 $8,198.97 $8,374.99 $8,541.86 $8,703.50
262.4
20
5.40%
1080.4
81
22.23%
326.4
25
6.72%
146.4
11
3.01%
101.0
15
2.08%
$1,916.7
39.44%
219.0
15
4.12%
1168.6
80
22.00%
418.0
29
7.87%
132.3
9
2.49%
102.4
13
1.93%
$2,040.4
38.41%
230.1
15
4.12%
1743.0
114
31.23%
393.5
26
7.05%
110.9
7
1.99%
181.7
22
3.26%
$2,659.2
47.65%
261.1
16
4.43%
1773.7
110
30.06%
424.5
26
7.20%
103.6
6
1.76%
115.5
13
1.96%
$2,678.4
45.40%
325.0
17
18.83%
2223.2
116
128.80%
449.0
23
26.02%
89.1
5
5.16%
127.5
12
7.39%
$3,213.8
186.20%
289.9
13
14.49%
2281.5
104
114.04%
371.6
17
18.57%
90.3
4
4.52%
128.5
11
6.42%
$3,161.9
158.04%
286.3
20
21.99%
2012.5
142
154.61%
461.0
33
35.41%
55.0
4
4.22%
208.1
32
15.99%
$3,022.7
232.23%
247.6
19
20.63%
1916.6
147
159.70%
448.9
34.41
37.40%
52.2
4
4.35%
272.3
40
22.69%
$2,937.6
244.77%
247.6
15
3.98%
1916.6
112
30.77%
448.9
26
7.21%
52.2
3
.84%
272.3
31
4.37%
$2,937.6
47.16%
308.5
16
4.38%
1850.9
96
26.30%
501.3
26
7.12%
154.2
8
2.19%
146.6
16
2.08%
$2,961.6
42.08%
326.3
16
4.37%
1957.8
96
26.23%
509.9
25
6.83%
163.2
8
2.19%
160.8
16
2.15%
$3,118.0
41.77%
335.3
16
4.38%
2011.6
96
26.30%
523.9
25
6.85%
167.6
8
2.19%
175.1
16
2.29%
$3,213.4
42.01%
343.4
16
4.38%
2060.5
96
26.30%
515.1
24
6.58%
171.7
8
2.19%
196.0
16
2.50%
$3,286.8
41.95%
351.6
16
4.38%
2109.7
96
26.30%
505.4
23
6.30%
175.8
8
2.19%
201.9
16
2.52%
$3,344.4
41.70%
358.4
16
4.37%
2150.5
96
26.23%
515.2
23
6.28%
179.2
8
2.19%
193.5
16
2.36%
$3,397.0
41.43%
367.1
16
4.38%
2202.7
96
26.30%
504.8
22
6.03%
183.6
8
2.19%
194.6
16
2.32%
$3,452.8
41.23%
374.4
16
4.38%
2246.6
96
26.30%
514.9
22
6.03%
187.2
8
2.19%
194.7
16.00
2.28%
$3,517.8
41.18%
381.5
16
4.38%
2289.1
96
26.30%
476.9
20
5.48%
190.8
8
2.19%
194.6
16.00
2.24%
$3,532.9
40.59%
906.9
170.8
0.0
255.2
822.6
$2,739.2
56.37%
822.6
189.0
0.0
180.4
831.2
$2,871.5
54.06%
831.2
189.0
0.0
169.0
851.2
$3,510.4
62.90%
851.2
208.3
0.0
167.1
892.4
$3,570.8
60.52%
892.4
25.9
0.0
43.4
874.9
$4,088.7
236.88%
874.9
84.5
0.0
87.1
872.3
$4,034.2
201.64%
872.3
45.8
0.0
130.7
787.4
$3,810.2
292.73%
787.4
55.8
0.0
23.6
819.6
$3,757.2
313.06%
819.6
212.0
0.0
284.8
746.8
$3,684.4
59.15%
746.8
250.0
0.0
149.4
847.4
$3,809.0
54.12%
847.4
212.7
0.0
169.5
890.7
$4,008.6
53.70%
890.7
221.8
0.0
178.1
934.3
$4,147.7
54.23%
934.3
207.6
0.0
186.9
955.1
$4,241.8
54.15%
955.1
200.5
0.0
191.0
964.6
$4,309.0
53.72%
964.6
246.0
0.0
192.9
1017.6
$4,414.6
53.84%
1017.6
251.2
0.0
203.5
1065.4
$4,518.1
53.95%
1065.4
247.7
0.0
213.1
1100.0
$4,617.8
54.06%
1100.0
248.0
0.0
220.0
1128.0
$4,661.0
53.55%
225.3
17
4.64%
556.7
42
11.46%
480.5
36
9.89%
751.3
15.46%
$2,013.8
41.44%
255.7
18
4.81%
564.2
39
10.62%
838.5
58
15.79%
399.9
7.53%
$2,058.3
38.75%
257.4
17
4.61%
514.0
34
9.21%
294.9
19
5.29%
437.2
7.83%
$1,503.4
26.94%
239.8
15
4.06%
427.3
26
7.24%
666.3
41
11.29%
1176.1
19.94%
$2,509.6
42.54%
454.4
24
26.32%
566.8
30
32.84%
974.2
51
56.44%
848.8
49.18%
$2,844.1
164.78%
388.3
18
19.41%
500.8
23
25.03%
619.6
28
30.97%
944.9
47.23%
$2,453.6
122.64%
329.3
23
25.30%
507.0
36
38.95%
352.4
25
27.08%
1518.3
116.65%
$2,707.0
207.98%
646.2
50
53.84%
469.6
36
39.13%
731.8
56
60.97%
1011.3
37.69%
$2,858.9
238.21%
646.2
38
10.37%
469.6
28
7.54%
731.8
43
11.75%
1011.3
16.24%
$2,858.9
45.90%
289.2
15
4.11%
482.0
25
6.85%
599.5
31
8.52%
893.0
12.69%
$2,263.8
32.17%
305.9
15
4.10%
509.9
25
6.83%
449.9
22
6.03%
947.2
12.69%
$2,212.9
29.65%
314.3
15
4.11%
523.9
25
6.85%
399.9
19
5.23%
970.6
12.69%
$2,208.7
28.88%
322.0
15
4.11%
536.6
25
6.85%
909.7
42
11.61%
994.2
12.69%
$2,762.4
35.26%
329.6
15
4.11%
549.4
25
6.85%
725.2
33
9.04%
1017.9
12.69%
$2,622.1
32.69%
336.0
15
4.10%
560.0
25
6.83%
728.1
33
8.88%
1040.4
12.69%
$2,664.6
32.50%
344.2
15
4.11%
573.6
25
6.85%
757.2
33
9.04%
1062.8
12.69%
$2,737.8
32.69%
351.0
15
4.11%
585.1
25
6.85%
748.9
32
8.77%
1084.0
12.69%
$2,768.9
32.42%
357.7
15
4.11%
596.1
25
6.85%
715.4
30
8.22%
1104.5
12.69%
$2,773.6
31.87%
UOIG 15
University of Oregon Investment Group
Appendix 6 – Discounted Cash Flows Valuation Assumptions
Method
Final Price Target
DCF
Comparable Analysis
Type
1 Year Daily
3 Year Weekly
Hamada Comps
5 Year Weekly
Hamada ETF
3 Year Daily
5 Year Daily
Vasicek Comps
Vasicek ETF
HOG Beta
Weighting
80.03
72.50
EBITDA
EBITDA Margin
EBITDA Growth
2011A
Avg. Industry Debt / Equity
Current Price
Undervalued
0.00%
Avg. Industry Tax Rate
77.77
0.00%
Current Reinvestment Rate
61.68
26.09%
(124.95%)
Reinvestment Rate in Year 2019E
2.67%
Implied Return on Capital in Perpetuity
112.53%
Terminal Value as a % of Total
Intermediate Growth Rate:
2024E
2025E
2025E
2026E
2027E
$1,609.7
$1,702.5
$1,784.9
$1,854.9
2012A
$680.4
$670.3
$654.6
$633.8
$608.2
7.60%
6.68%
5.76%
4.84%
3.92%
2013A
03/31/2014 A
Q2
06/31/2014 A
54.0%
Implied 2014A EBITDA Multiple
$1,508.8
Q1
2010A
70.00%
30.00%
Price Target
Beta SE Weighting
1.18 0.10
0.00%
1.12 0.14
0.00%
0.91
5.00%
1.54 0.09
5.00%
1.03
10.00%
1.25 0.06
15.00%
1.42 0.04
20.00%
0.98 0.03
20.00%
1.04 0.02
25.00%
1.15
Considerations
Q3
09/31/2014A
12.7x
Implied Multiple in Year 2023E
4.7x
Free Cash Flow Growth Rate in Year 2023E
8%
Q4
12/31/2014A
2014A
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
$815.8
$1,010.4
$1,169.2
$1,320.8
$454.3
$634.8
$354.8
$246.0
$1,689.9
$2,186.1
$2,198.3
$2,028.8
$1,700.2
$1,741.4
$2,079.3
$2,198.4
$2,322.5
$2,453.5
16.79%
19.02%
20.95%
22.39%
26.32%
31.73%
27.26%
20.50%
27.13%
31.06%
29.45%
26.53%
21.70%
21.71%
25.36%
26.25%
27.19%
28.19%
23.85%
15.72%
12.97%
(30.65%)
586.86%
29.36%
.56%
(7.71%)
(16.20%)
2.43%
19.40%
5.73%
5.64%
5.64%
(65.61%)
39.74%
(44.12%)
UOIG 16
University of Oregon Investment Group
Appendix 7 –Sensitivity Analysis
Implied Price
Undervalued/(Overvalued)
Terminal Growth Rate
Adjusted Beta
Terminal Growth Rate
80
2.0%
2.5%
3.0%
3.5%
4.0%
0
2.3%
2.3%
3.0%
3.8%
4.5%
1.05
80.10
85.19
91.34
98.90
108.44
1.05
33.80%
33.80%
48.08%
67.61%
95.93%
1.10
85.14
90.92
97.96
106.73
117.96
1.10
42.50%
42.50%
58.82%
81.54%
115.37%
1.15
85.14
90.92
97.96
106.73
117.96
1.15
42.50%
42.50%
58.82%
81.54%
115.37%
1.20
80.10
85.19
91.34
98.90
108.44
1.20
33.80%
33.80%
48.08%
67.61%
95.93%
1.25
71.27
75.28
80.03
85.77
92.83
1.25
18.67%
18.67%
29.76%
44.47%
64.92%
Adjusted Beta
Implied Price
Terminal Growth Rate
WACC
80
2.3%
2.3%
3.0%
3.8%
4.5%
6.29%
79.8
79.8
86.7
95.7
108.3
7.29%
83.6
83.6
90.5
99.6
112.2
8.29%
83.6
83.6
90.5
99.6
112.2
9.29%
79.8
79.8
86.7
95.7
108.3
10.29%
73.2
73.2
80.0
89.1
101.7
UOIG 17
University of Oregon Investment Group
Appendix A– Harley Davidson Motorcycle Prices
Sportster
Starting
Mid Range
High
Superlow
$ 8,249
$ 8,599
$ 8,799
Iron 833
$ 8,399
$ 8,774
$ 9,149
Starting
Mid Range
High
Street Bob
$ 13,449
$ 13,849
$ 14,199
Low Rider
$ 14,199
$ 14,599
$ 14,949
Starting
Mid Range
High
Fat Boy
$ 17,699
$ 18,099
$ 18,499
Fat Boy Lo.
$ 17,499
$ 17,899
$ 18,499
1200 Custom
$ 10,649
$ 10,999
$ 11,199
Superlow 1200T
$
11,799
$
12,149
$
12,349
Forty-Eight
$
10,749
$
11,099
$
11,199
Seventy-Two
$
10,849
$
11,224
$
11,599
Dyna
Wide Glide
$ 15,799
$ 16,594
$ 16,749
Fat Bob
$ 15,699
$ 15,899
$ 16,099
Swithcback
$
16,999
$
17,199
$
17,399
Softail
Softail Deluxe
Heritage Softail Classic
Softail Slim
$ 18,099
$ 18,349
$
$ 18,699
$ 18,749
$
$ 19,299
$ 19,099
$
Breakout
15,899
16,374
16,849
$ 18,599
$ 19,199
$ 19,799
V Rod
Night Rod Special
V Rod Muscle
Starting
$ 16,549
$ 16,149
Mid Range
$ 16,724
$ 16,499
High
$ 16,899
$ 16,699
Touring
Road King
Starting
Mid Range
High
Street Glide
Street Glide Special
$ 18,449
$ 20,599
$ 22,899
$ 18,974
$ 21,099
$ 23,149
$ 19,499
$ 21,649
$ 23,399
Electra Glide Ultra
$ 23,249
$ 23,899
$ 24,549
Ultra Limited
$
26,099
$
26,749
$
27,399
Road Glide
Roade G Special
$ 20,899
$ 23,199
$ 21,149
$ 23,449
$ 21,399
$ 23,699
CVO
Street Glide
Limited
Starting
$ 36,349
Mid Range
$ 36,349
High
$ 36,349
Ultra
$ 39,349
$ 39,349
$ 39,349
Softail Deluxe
$
$
$
39,649
39,649
39,649
750 Tri Glide Ultra
7,499
$
7,647
$
7,794
$
32,999
33,974
34,949
$ 28,999
$ 28,999
$ 28,999
Street/Trike
Starting
Mid Range
High
$
$
$
500
6,799
6,947
7,094
$
$
$
Freewheeler
$ 24,999
$ 25,249
$ 25,499
UOIG 18
University of Oregon Investment Group
Appendix 8 – Sources







Surge production summary
http://octotutor.com/strategic-initiative-paper-harley-davidson-fin-370-week-3/
IBIS World
SEC Filings
Harley-Davidson Investor Relations
Thomson-Reuters
Factset
Yahoo! Finance
UOIG 19