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Harley-Davidson Inc Valuation – June 2016 $HOG

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – June 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Harley-Davidson Inc (HOG) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). The Company operates in two segments: the Motorcycles & Related Products (Motorcycles) and the Financial Services. The Motorcycles segment consists of HDMC, which designs, manufactures and sells at wholesale on-road l Harley-Davidson motorcycles, as well as a line of motorcycle parts, accessories, general merchandise and related services. The Company offers its products to retail customers through a network of independent dealers. The Company operates across the world, including the Americas, Europe/Middle East/Africa (EMEA) and Asia-Pacific. The Financial Services segment consists of HDFS, which provides wholesale and retail financing and insurance, and insurance-related programs to the Harley-Davidson dealers and their retail customers. HDFS conducts business in the United States and Canada.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of HOG – June 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $7,134,178,102 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.74 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 78.89% Pass
6. Moderate PEmg Ratio PEmg < 20 11.76 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.13 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.74 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.87 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

HOG value chart June 2016

EPSmg $3.61
MG Growth Estimate 14.01%
MG Value $131.68
Opinion Undervalued
MG Grade B
MG Value based on 3% Growth $52.29
MG Value based on 0% Growth $30.65
Market Implied Growth Rate 1.63%
Current Price $42.39
% of Intrinsic Value 32.19%

Harley-Davidson Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability over the last ten years. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $1.86 in 2012 to an estimated $3.61 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.63% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

Harley-Davidson Inc performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

HOG charts June 2016

Net Current Asset Value (NCAV) -$22.17
Graham Number $29.43
PEmg 11.76
Current Ratio 1.74
PB Ratio 4.13
Current Dividend $1.28
Dividend Yield 3.02%
Number of Consecutive Years of Dividend Growth 6

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Useful Links:

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GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $4,491,750,000
Total Current Liabilities $2,588,006,000
Long-Term Debt $5,460,553,000
Total Assets $10,467,671,000
Intangible Assets $54,585,000
Total Liabilities $8,574,851,000
Shares Outstanding (Diluted Average) 184,204,000

Earnings Per Share History

Next Fiscal Year Estimate $3.68
Dec2015 $3.69
Dec2014 $3.88
Dec2013 $3.28
Dec2012 $2.72
Dec2011 $2.55
Dec2010 $0.62
Dec2009 -$0.24
Dec2008 $2.79
Dec2007 $3.74
Dec2006 $3.93
Dec2005 $3.41
Dec2004 $3.00
Dec2003 $2.50
Dec2002 $1.90
Dec2001 $1.43
Dec2000 $1.13
Dec1999 $0.87
Dec1998 $0.69
Dec1997 $0.57
Dec1996 $0.55

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.61
Dec2015 $3.45
Dec2014 $3.09
Dec2013 $2.40
Dec2012 $1.86
Dec2011 $1.59
Dec2010 $1.46
Dec2009 $2.16
Dec2008 $3.37
Dec2007 $3.54
Dec2006 $3.28
Dec2005 $2.79
Dec2004 $2.31
Dec2003 $1.83
Dec2002 $1.40
Dec2001 $1.08
Dec2000 $0.86

Recommended Reading:

Other ModernGraham posts about the company

19 Best Stocks For Value Investors This Week – 1/9/16
Harley-Davidson Inc Valuation – January 2016 Update $HOG
The Best Companies of the Auto Industry – October 2015
5 Undervalued Companies for Enterprising Investors Near 52 Week Lows – October 2015
13 Best Stocks For Value Investors This Week – 10/3/15

Other ModernGraham posts about related companies

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Harley-Davidson Inc Valuation – January 2016 Update $HOG
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BorgWarner Inc. Valuation – November 2015 Update $BWA
The Best Companies of the Auto Industry – October 2015

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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