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 Undervalued Stocks for the Enterprising Investor – August 2017. 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 Harley-Davidson motorcycles, as well as motorcycle parts, accessories, general merchandise and related services. The Company manufactures and sells at wholesale cruiser and touring motorcycles. The Financial Services segment consists of HDFS, which provides wholesale and retail financing and insurance-related programs to the Harley-Davidson dealers and their retail customers. HDFS is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans for the purchase of Harley-Davidson motorcycles.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of HOG – August 2017
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 | $8,183,423,170 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 1.27 | 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 | 249.84% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 13.02 | Pass | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 4.11 | Fail | |
| 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 | 1.27 | Fail | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 5.26 | 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
| EPSmg | $3.69 |
| MG Growth Estimate | 8.08% |
| MG Value | $90.87 |
| Opinion | Undervalued |
| MG Grade | C |
| MG Value based on 3% Growth | $53.44 |
| MG Value based on 0% Growth | $31.33 |
| Market Implied Growth Rate | 2.26% |
| Current Price | $47.97 |
| % of Intrinsic Value | 52.79% |
Harley-Davidson Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned with the  low current ratio, insufficient earnings stability over the last ten years, and the high PB ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets.  As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.4 in 2013 to an estimated $3.69 for 2017. Â This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.26% annual earnings growth over the next 7-10 years. Â As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Harley-Davidson Inc revealed the company was trading above its Graham Number of $29.61. Â The company pays a dividend of $1.4 per share, for a yield of 2.9%, putting it among the best dividend paying stocks today. Â Its PEmg (price over earnings per share – ModernGraham) was 13.02, which was below the industry average of 18.18, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Â Finally, the company was trading above its Net Current Asset Value (NCAV) of $-23.94.
Harley-Davidson Inc receives an average overall rating in the ModernGraham grading system, scoring a C.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$23.94 |
| Graham Number | $29.61 |
| PEmg | 13.02 |
| Current Ratio | 1.27 |
| PB Ratio | 4.11 |
| Current Dividend | $1.40 |
| Dividend Yield | 2.92% |
| Number of Consecutive Years of Dividend Growth | 6 |
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| ModernGraham tagged articles | Morningstar |
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Most Recent Balance Sheet Figures
| Balance Sheet Information | 6/1/2017 |
| Total Current Assets | $4,244,602,000 |
| Total Current Liabilities | $3,354,761,000 |
| Long-Term Debt | $4,678,350,000 |
| Total Assets | $10,487,771,000 |
| Intangible Assets | $54,630,000 |
| Total Liabilities | $8,441,604,000 |
| Shares Outstanding (Diluted Average) | 175,324,000 |
Earnings Per Share History
| EPS History | |
| Next Fiscal Year Estimate | $3.57 |
| Dec2016 | $3.83 |
| 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 | $0.86 |
| Dec1998 | $0.69 |
| Dec1997 | $0.57 |
Earnings Per Share – ModernGraham History
| EPSmg History | |
| Next Fiscal Year Estimate | $3.69 |
| Dec2016 | $3.66 |
| 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 |
Recommended Reading:
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
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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