Harley-Davidson Inc Valuation – January 2016 Update $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 Most Undervalued Companies for the Defensive Investor – November 2015.  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) segment and the Financial Services segment. The Motorcycles segment consists of HDMC, which designs, manufactures and sells street-legal Harley-Davidson motorcycles, as well as a line of motorcycle parts, accessories, general merchandise and related services. The Company’s products are sold to retail customers through a network of independent dealers. The Financial Services segment consists of HDFS, which provides wholesale and retail financing, and insurance and insurance-related programs to Harley-Davidson dealers and their retail customers. The Company conducts its business around the world, including in North America, Europe, the Middle East and Africa (EMEA); Asia-Pacific, and Latin America.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of HOG – January 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 $8,741,204,474 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.73 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 2.29% Fail
6. Moderate PEmg Ratio PEmg < 20 13.36 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.63 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 1.73 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.59 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 January 2016

EPSmg $3.40
MG Growth Estimate 15.00%
MG Value $131.03
Opinion Undervalued
MG Value based on 3% Growth $49.35
MG Value based on 0% Growth $28.93
Market Implied Growth Rate 2.43%
Current Price $45.48
% of Intrinsic Value 34.71%

Harley Davidson Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, and the insufficient earnings stability or growth over the last ten years.  The Enterprising Investor is only initially concerned by the level of debt relative to the net current assets . As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.59 in 2011 to an estimated $3.40 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.43% 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.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Harley Davidson Inc (HOG)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

HOG Charts January 2016

Net Current Asset Value (NCAV) -$17.38
Graham Number $32.60
PEmg 13.36
Current Ratio 1.73
PB Ratio 3.63
Dividend Yield 2.65%
Number of Consecutive Years of Dividend Growth 5



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Most Recent Balance Sheet Figures

Balance Sheet Information Sep15
Total Current Assets $4,616,041,000
Total Current Liabilities $2,663,005,000
Long-Term Debt $5,054,347,000
Total Assets $10,731,560,000
Intangible Assets $54,267,000
Total Liabilities $8,171,885,000
Shares Outstanding (Diluted Average) 204,580,000

Earnings Per Share History

Next Fiscal Year Estimate $3.54
Dec14 $3.88
Dec13 $3.28
Dec12 $2.72
Dec11 $2.55
Dec10 $0.62
Dec09 -$0.24
Dec08 $2.79
Dec07 $3.74
Dec06 $3.93
Dec05 $3.41
Dec04 $3.00
Dec03 $2.50
Dec02 $1.90
Dec01 $1.43
Dec00 $1.13
Dec99 $0.86
Dec98 $0.69
Dec97 $0.57
Dec96 $0.55
Dec95 $0.38

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.40
Dec14 $3.09
Dec13 $2.40
Dec12 $1.86
Dec11 $1.59
Dec10 $1.46
Dec09 $2.16
Dec08 $3.37
Dec07 $3.54
Dec06 $3.28
Dec05 $2.79
Dec04 $2.31
Dec03 $1.83
Dec02 $1.40
Dec01 $1.08
Dec00 $0.86
Dec99 $0.68

Recommended Reading:

Other ModernGraham posts about the company

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
Harley-Davidson Inc. Analysis – October 2015 Update $HOG
Harley Davidson Analysis – June 2015 Update $HOG

Other ModernGraham posts about related companies

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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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