February 6
, 2015
Consumer Goods
John Roskos
Investment Thesis
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
Flexible “Surge Manufacturing” process will enable company to produce highly demanded bikes with precise timing
Cost cutting benefits from restructuring to be continually recognized in margin expansion
Harley Davidson
Ticker: HOG Current Price: $61.68 Recommendation: Buy Price Target: $72.86Key Statistics
52 Week Price Range
$54.22 - $74.13
50-Day M oving Average
$65.56
Estimated Beta
1.15
Dividend Yield
1.70%
M arket Capitalization
$16,093
3-Year Revenue CAGR
5.45%
Trading Statistics
Diluted Shares Outstanding
220
Average Volume (3-M onth)
3,576,539
Institutional Ownership
82%
Insider Ownership
1%
EV/EBITDA (LTM )
8.8x
Margins and Ratios
Gross M argin (LTM )
48.81%
EBITDA M argin (LTM )
27.13%
Net M argin (LTM )
14.68%
Debt to Enterprise Value
0.20
05000000 10000000 15000000 20000000 25000000 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 2/2/2010 2/2/2011 2/2/2012 2/2/2013 2/2/2014 Volume Adj Close 50-Day Avg 200-Day Avg
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 plan to power a pedal-bicycle with an engine. Incorporated in Milwaukee, Wisconsin, Harley-Davidson is one of only two American motorcycle manufactures to survive the Great Depression and more recently the 2009 recession.
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
Consisting of nearly 90% of HOG’s total revenue, the Motorcycles and Related Products segment involves the design and wholesale of motorcycles along with lines of motorcycle parts, accessories, and merchandise. Within this segment, worldwide sales of motorcycle units generated 77% of segment revenues last year. 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 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 segment provides wholesale and resale financing along with insurance programs to Harley dealers and customers. The HDFS segment only services U.S. and Canadian customers.
Although Harley does not require their independent retailers to utilize HDFS, as of 2013, the company reported that 100% of HOG dealers in U.S. and Canada used the company’s financing services. HDFS continually issues a substantial 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.
Year
Revenue in Millions % of Total Revenue2010A 4176.63 85.95%
2011A 4662.26 87.77%
2012A 4942.58 88.57%
2013A 5258.29 89.13%
2014A 5567.68 89.39%
Motorcycle & Related Products
Year
Revenue in Millions % of Total Revenue2010A 682.71 14.05% 2011A 649.45 12.23% 2012A 637.92 11.43% 2013A 641.58 10.87% 2014A 660.83 10.61%
Financial Services
Year Total Registrations HOG Registrations HOG % Share
2011 289.9 150.9 52.05%
2012 299.4 161.3 53.87%
2013 305.9 167.8 54.85%
U.S. Motorcycle Registration Data (In Thousands) Harley-Davidson SEC Filings
Harley-Davidson SEC Filings
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. Being the longest running motorcycle company in America has allowed them to build a name stronger than any.
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. 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 motorcycle rallies. The company views the customer experience as the center of much of the company’s marketing strategy. As of 2014, the Harley Owners Group had more than 1 million members.
Cost Management and Flexible Production
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.
Because the company is vertically integrated, manufacturing processes are closely scrutinized to find room for improvement. 2014 marked the company’s second 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
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.
$ In Millions 2011 2012 2013
PII Motorcycle Sales 134.3 195.8 219.8
% Growth - 45.79% 12.26%
$ In Millions 2011 2012 2013
HOG Motorcycle Sales 3554.5 3764.8 4067.5
% Growth 7.16% 5.92% 8.04%
2010A
2011A
2012A
2013A
2014A
Inventory 326.4 418.0 393.5 424.5 448.9
Days Inventory Outstanding 25 29 26 26 26
% of Revenue 6.72% 7.87% 7.05% 7.20% 7.21%
2011A
2012A
2013A
2014A
Touring Motorcycle Units 92002 99496 107213 111240
% Change 12.30% 8.15% 7.76% 3.76%
% Of Total 39.47% 40.18% 41.16% 41.00%
Polaris Industries Motorcycle Sales
Harley-Davidson Motorcycle Sales
Harley-Davidson Inventory Levels
Industry
Overview
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.
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.
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.
47.50%
52.50%
HOG Other
Year 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%
Per Capita Disposable Income
Year Amount % Change
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%
Year Index 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%
Motorcycle Manufacturing Data Outlook
Consumer Confidence
Harley-Davidson U.S. Market Share
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
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 generational and multi-cultural marketing strategy outside of the company’s core customer base. They define this new target market as “outreach customers”. These outreach customers
FX
2/2/2015
USD / Euro
0.88
USD / JPY
0.00854
USD / CAD
0.79
International% of Total
2015E
99,146.4135.53%
2016E
102,120.8035.75%
2017E
105,184.43
35.98%
2018E
108,339.96
36.22%
2019E
111,590.16
36.48%
2020E
114,937.86
36.79%
Full Service Dealership Non-Traditional U.S. 696 92 Canada 69 5 EMEA 371 20 Asia 271 8 Lain America 51 29 Total 1458 154Foreign Exchange Rates
HOG International Sales % of Revenue
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.
Management and Employee Relations
Keith Wandell – Chairman, President and Chief Executive
Officer
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.
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.
Portfolio Strategy
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.
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.
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 2,000,000.00 4,000,000.00 6,000,000.00 8,000,000.00 10,000,000.00 12,000,000.00 1
Salary Bonus Stock Awards Other
$40 $60 $80 $100 $120 $140 $160 $180 PII HOG
Keith Wandell Compensation
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 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
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
Downside
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
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.
Revenue
Net Income
EPS
$6.23 B
$844.6 M
$3.88
5.6% +
15.1% +
18.3% +
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 2012 2013 2014 2015 2016 2017Trade-weighted Index Projections HOG Fiscal Year 2014 vs 2013 Figures
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
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.
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.”
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.”
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
$5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 1 2 3 4 5 6 7
Indian Price HOG Price
$0.75 $1.50 $2.25 $3.00 $3.75 $4.50 2010 2011 2012 2013 2014
HOG EPS HMC EPS
HOG vs PII Motorcycle Model Price Spread
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
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.
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.
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.
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.
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.
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.
$0.0 $1,000.0 $2,000.0 $3,000.0 $4,000.0 $5,000.0 $6,000.0 $7,000.0 $8,000.0 $9,000.0
Motorcycles & Related Revenue
34.00% 34.50% 35.00% 35.50% 36.00% 36.50% 37.00% 37.50% 38.00% 38.50%
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.
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.
Type
Beta SE
Weighting
1 Year Daily
1.18 0.10
0.00%
3 Year Weekly
1.12 0.14
0.00%
Hamada Comps 0.91
5.00%
5 Year Weekly
1.54 0.09
5.00%
Hamada ETF
1.03
10.00%
3 Year Daily
1.25 0.06
15.00%
5 Year Daily
1.42 0.04
20.00%
Vasicek Comps
0.98 0.03
20.00%
Vasicek ETF
1.04 0.02
25.00%
HOG Beta
1.15
Method Final Price Target Weighting
DCF 80.03 70.00%
Comparable Analysis 72.50 30.00%
Price Target 77.77
Current Price 61.68
Undervalued 26.09%
Appendix 1 – Relative Valuation
Comparables Analysis HOG PII DOO-CA HMC GM
($ in millions)
Harley-Davidson, Inc.
Polaris
Industries Inc. BRP, Inc.
Honda Motor Co.
General Motors Company
Stock Characteristics Max Min Median Weight Avg. 60.00% 30.00% 10.00% 0.00%
Current Price $144.15 $22.07 $32.35 $96.27 $61.68 $144.15 $22.07 $31.59 $33.11
Beta 1.22 0.50 0.94 0.96 1.15 1.22 0.50 0.78 1.10
Size
Short-Term Debt 25,467.5 2.5 7,087.5 2,553.3 352.4 2.5 16.9 25,467.5 14,158.0 Long-Term Debt 31,402.8 5.7 11,124.3 3,276.2 3,573.1 223.6 5.7 31,402.8 22,025.0 Cash and Cash Equivalent 30,240.0 (979.9) 5,846.9 1,261.5 (979.9) 137.6 77.6 11,556.3 30,240.0 Non-Controlling Interest 1,887.8 0.0 283.5 188.8 0.0 0.0 0.0 1,887.8 567.0
Preferred Stock 3,109.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3,109.0
Diluted Basic Shares 1,802.3 68.2 894.7 255.2 220.1 68.2 113.4 1,802.3 1,676.0 Market Capitalization 56,934.5 2,502.7 32,663.8 12,345.4 14,435.4 9,835.2 2,502.7 56,934.5 55,492.4 Enterprise Value 127,248.8 2,603.0 66,340.7 19,625.1 19,340.8 10,199.0 2,603.0 127,248.8 122,482.4
Growth Expectations
% Revenue Growth 2015E 12.99% 2.20% 7.30% 9.64% 12.99% 11.80% 5.50% 9.10% 2.20% % Revenue Growth 2016E 9.51% 3.46% 5.63% 8.03% 6.07% 9.51% 6.00% 5.26% 3.46% % EBITDA Growth 2015E 37.30% 13.56% 16.37% 14.49% 29.36% 13.56% 15.40% 17.34% 37.30% % EBITDA Growth 2016E 14.50% 0.56% 10.90% 13.38% 0.56% 14.50% 12.50% 9.29% 3.20% % EPS Growth 2015E 63.80% 13.16% 18.03% 15.02% 38.68% 13.16% 17.60% 18.46% 63.80% % EPS Growth 2016E 17.11% -0.62% 13.89% 16.17% -0.62% 17.11% 15.60% 12.18% 7.00%
Profitability Margins Gross Margin 52.47% 15.79% 26.69% 28.56% 52.47% 30.08% 25.90% 27.49% 15.79% EBIT Margin 28.94% 5.76% 7.30% 12.73% 28.94% 16.27% 7.53% 7.07% 5.76% EBITDA Margin 31.06% 9.80% 11.49% 16.76% 31.06% 19.89% 12.61% 10.38% 9.80% Net Margin 18.02% 4.79% 5.48% 8.73% 18.02% 10.86% 5.61% 5.34% 4.79% Credit Metrics Interest Expense $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Debt/EV 0.45 0.02 0.32 0.16 0.20 0.02 0.35 0.45 0.30 Leverage Ratio 4.47 0.05 1.30 0.59 1.80 0.21 0.05 4.47 2.40
Interest Coverage Ratio 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Operating Results Revenue $153,807.0 $3,687.0 $63,983.8 $16,645.1 $7,037.4 $5,484.4 $3,687.0 $122,483.2 $153,807.0 Gross Profit $33,666.7 $955.0 $12,965.2 $4,642.8 $3,692.8 $1,649.5 $955.0 $33,666.7 $24,281.0 EBIT $8,859.0 $277.5 $4,776.8 $1,484.8 $2,036.8 $892.4 $277.5 $8,661.2 $8,859.0 EBITDA $15,078.0 $465.0 $6,900.3 $2,065.1 $2,186.1 $1,091.0 $465.0 $12,709.5 $15,078.0 Net Income $7,368.0 $207.0 $3,570.0 $1,073.8 $1,268.3 $595.5 $207.0 $6,544.6 $7,368.0 Capital Expenditures $8,044.0 $169.0 $2,796.6 $707.4 $250.0 $194.7 $169.0 $5,398.4 $8,044.0 Multiples EV/Revenue 2.7x 0.7x 0.9x 1.4x 2.7x 1.9x 0.7x 1.0x 0.8x EV/Gross Profit 6.2x 2.7x 4.4x 4.9x 5.2x 6.2x 2.7x 3.8x 5.0x EV/EBIT 14.7x 9.4x 12.6x 11.1x 9.5x 11.4x 9.4x 14.7x 13.8x EV/EBITDA 10.0x 5.6x 8.7x 8.3x 8.8x 9.3x 5.6x 10.0x 8.1x EV/(EBITDA-Capex) 17.4x 8.8x 14.4x 11.2x 10.0x 11.4x 8.8x 17.4x 17.4x
Market Cap/Net Income = P/E 16.5x 7.5x 10.4x 14.4x 11.4x 16.5x 12.1x 8.7x 7.5x
PEG 1.3x 0.1x 0.6x 1.0x 0.3x 1.3x 0.7x 0.5x 0.1x
Multiple Implied Price Weight
EV/Revenue 23.49
EV/Gross Profit 60.03
EV/EBIT 80.83
EV/EBITDA 60.06 40.00%
EV/(EBITDA-Capex) 76.30 20.00%
Market Cap/Net Income = P/E 83.04 40.00%
Price Earnings/ Growth 224.38
Price Target $72.50
Appendix 2 – Discounted Cash Flows Valuation
Discounted Cash Flow Analysis Q1 Q2 Q3 Q4
($ in millions) 2010A 2011A 2012A 2013A 03/31/2014 A 06/31/2014 A 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 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 % Change (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%)
% Revenue 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% Financial Services Interest Expense 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
% Revenue 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%
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
% Beginning PP&E 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%
Financial Services Provision for Credit Loss 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
% Revenue 1.92% .32% .40% 1.02% 1.18% .80% 1.65% 1.50% 1.22% .91% .91% .91% .91% .91% .91% .91% .91% .91%
Selling, Administrative and Engineering 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
% Revenue 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%
Restructuring (benefit) expense and Asset Impairment 163.5 68.0 28.5 -2.1 - - - - - - - - -
-% Revenue 3.36% 1.28% 0.51% -0.04% - - - - - - - - - - - - -
-Earnings Before Interest & Taxes $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 % Revenue 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% Investment (Income) (5.44) (7.96) (7.37) (5.86) (1.66) (1.77) (1.51) (1.56) (6.50) - - - - - -
-% Revenue (.11%) (.15%) (.13%) (.10%) (.10%) (.09%) (.12%) (.13%) (.10%) - - - - - - - -
-Interest Expense 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
% Revenue 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%
Income from Discontinued Operations net of Tax 85.2 51.0 - - - - - - - - - - -
-% Revenue 1.75% 1.05% - - - - - - - - - - - - - - -
-Other Expenses (Income) 113.1 - - - - - - - - - - - -
-% Revenue 2.33% - - - - - - - - - - - - - - - -
-Earnings Before Taxes 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) 130.8 244.6 337.6 380.3 142.9 194.9 75.4 79.5 492.8 698.1 693.7 629.8 509.4 521.9 640.5 678.5 718.5 762.0 Tax Rate 47.16% 30.86% 35.11% 34.13% 34.96% 35.50% 33.43% 35.50% 35.02% 35.50% 35.50% 35.50% 35.50% 35.50% 35.50% 35.50% 35.50% 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
Operating Cash Flow $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 % Revenue 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% Current Assets 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 2013.8 2058.3 1503.4 2509.6 2844.1 2453.6 2707.0 2858.9 2858.9 2263.8 2212.9 2208.7 2762.4 2622.1 2664.6 2737.8 2768.9 2773.6
% Revenue 41.44% 38.75% 26.94% 42.54% 164.78% 122.64% 207.98% 238.21% 45.90% 32.17% 29.65% 28.88% 35.26% 32.69% 32.50% 32.69% 32.42% 31.87%
Net Working Capital ($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 $759.3
% Revenue (2.00%) (.34%) 20.71% 2.86% 21.42% 35.40% 24.25% 6.56% 1.26% 9.91% 12.13% 13.14% 6.69% 9.01% 8.93% 8.54% 8.77% 8.72% Change in Working Capital 79.2 1173.6 -986.9 200.9 338.5 -392.5 -237.0 -90.1 619.0 207.4 99.6 -480.4 198.0 10.1 -17.4 33.9 10.4 Capital Expenditures 170.8 189.0 189.0 208.3 25.9 84.5 45.8 55.8 212.0 250.0 212.7 221.8 207.6 200.5 246.0 251.2 247.7 248.0
% Revenue 3.52% 3.56% 3.39% 3.53% 1.50% 4.22% 3.52% 4.65% 3.40% 3.55% 2.85% 2.90% 2.65% 2.50% 3.00% 3.00% 2.90% 2.85%
Acquisitions 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Appendix 3 – Revenue Model
Revenue Q1 Q2 Q3 Q4
($ in millions) 2010A 2011A 2012A 2013A 03/31/2014 A 06/31/2014 A 09/31/2014A 12/31/2014A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Motorcycles & Related Products $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 $7,917.0 % 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 $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 % Growth 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 $8,703.5 % Growth 9.31% 5.06% 5.72% 22.05% 11.50% 10.55% .80% 5.57% 12.99% 6.07% 2.47% 2.43% 2.39% 2.22% 2.15% 1.99% 1.89%
Revenue Model Motorcycle Segment Q1 Q2 Q3 Q4
($ in millions) 2010A 2011A 2012A 2013A 03/31/2014 A 06/31/2014 A 09/31/2014A 12/31/2014A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Motorcycles 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
% Growth 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% General Merchandise 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 % Growth (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% % of Total Revenue 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% Other 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 % Growth (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% % of Total Revenue .34% .36% .37% .42% .28% .30% .55% .58% .39% .33% .32% .31% .31% .30% .30% .30% .29% .29% Buell Motorcycles 16.3 12.6 - - - - - - - - - - -% Growth (65.00%) (22.85%) - - - - - - - - - - - - - -% of Total Revenue .37% .27% - - - - - - - - - - - - - - - -Total Revenue $4,356.6 $4,674.8 $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 $7,917.0 % Growth 7.30% 5.73% 6.39% 11.13% 12.43% (3.97%) 7.13% 5.88% 14.06% 6.50% 2.52% 2.48% 2.44% 2.28% 2.21% 2.05% 1.95%
Appendix 4 – Revenue Model Continued
Motorcycle Unit Shipments in Thousands 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
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% International 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%
Touring Motorcycle Units 92002 99496 107213 111240 106037 107132 111098 116655 122372 129653 133908 139830 142495
% 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%
Custom Motorcycle Units 91459 96425 102950 108527 122780 122844 122792 119646 116253 110908 108402 104059 106043
% 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
Appendix 5 – Working Capital Model
Working Capital Model Q1 Q2 Q3 Q4
($ in millions) 2010A 2011A 2012A 2013A 03/31/2014 A 06/31/2014 A 09/31/2014A 12/31/2014A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Total Revenue $4,859.34 $5,311.71 $5,580.50 $5,899.87 $1,726.05 $2,000.70 $1,301.60 $1,200.16 $6,228.51 $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 Current Assets
Accounts Receivable 262.4 219.0 230.1 261.1 325.0 289.9 286.3 247.6 247.6 308.5 326.3 335.3 343.4 351.6 358.4 367.1 374.4 381.5
Days Sales Outstanding A/R 20 15 15 16 17 13 20 19 15 16 16 16 16 16 16 16 16 16 % of Revenue 5.40% 4.12% 4.12% 4.43% 18.83% 14.49% 21.99% 20.63% 3.98% 4.38% 4.37% 4.38% 4.38% 4.38% 4.37% 4.38% 4.38% 4.38%
Finance Receivable 1080.4 1168.6 1743.0 1773.7 2223.2 2281.5 2012.5 1916.6 1916.6 1850.9 1957.8 2011.6 2060.5 2109.7 2150.5 2202.7 2246.6 2289.1
Days Sales Outstanding A/R 81 80 114 110 116 104 142 147 112 96 96 96 96 96 96 96 96 96 % of Revenue 22.23% 22.00% 31.23% 30.06% 128.80% 114.04% 154.61% 159.70% 30.77% 26.30% 26.23% 26.30% 26.30% 26.30% 26.23% 26.30% 26.30% 26.30%
Inventory 326.4 418.0 393.5 424.5 449.0 371.6 461.0 448.9 448.9 501.3 509.9 523.9 515.1 505.4 515.2 504.8 514.9 476.9
Days Inventory Outstanding 25 29 26 26 23 17 33 34.41 26 26 25 25 24 23 23 22 22 20 % of Revenue 6.72% 7.87% 7.05% 7.20% 26.02% 18.57% 35.41% 37.40% 7.21% 7.12% 6.83% 6.85% 6.58% 6.30% 6.28% 6.03% 6.03% 5.48%
Deferred Income Taxes 146.4 132.3 110.9 103.6 89.1 90.3 55.0 52.2 52.2 154.2 163.2 167.6 171.7 175.8 179.2 183.6 187.2 190.8
Days Prepaid Expense Outstanding 11 9 7 6 5 4 4 4 3 8 8 8 8 8 8 8 8 8 % of Revenue 3.01% 2.49% 1.99% 1.76% 5.16% 4.52% 4.22% 4.35% .84% 2.19% 2.19% 2.19% 2.19% 2.19% 2.19% 2.19% 2.19% 2.19%
Other Assets 101.0 102.4 181.7 115.5 127.5 128.5 208.1 272.3 272.3 146.6 160.8 175.1 196.0 201.9 193.5 194.6 194.7 194.6
Days COGS Outstanding 15 13 22 13 12 11 32 40 31 16 16 16 16 16 16 16 16.00 16.00 % of Revenue 2.08% 1.93% 3.26% 1.96% 7.39% 6.42% 15.99% 22.69% 4.37% 2.08% 2.15% 2.29% 2.50% 2.52% 2.36% 2.32% 2.28% 2.24%
Total Current Assets $1,916.7 $2,040.4 $2,659.2 $2,678.4 $3,213.8 $3,161.9 $3,022.7 $2,937.6 $2,937.6 $2,961.6 $3,118.0 $3,213.4 $3,286.8 $3,344.4 $3,397.0 $3,452.8 $3,517.8 $3,532.9
% of 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%
Long Term Assets
Net PP&E Beginning 906.9 822.6 831.2 851.2 892.4 874.9 872.3 787.4 819.6 746.8 847.4 890.7 934.3 955.1 964.6 1017.6 1065.4 1100.0 Capital Expenditures 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
Acquisitions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
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 Net PP&E Ending 822.6 831.2 851.2 892.4 874.9 872.3 787.4 819.6 746.8 847.4 890.7 934.3 955.1 964.6 1017.6 1065.4 1100.0 1128.0 Total Current Assets & Net PP&E $2,739.2 $2,871.5 $3,510.4 $3,570.8 $4,088.7 $4,034.2 $3,810.2 $3,757.2 $3,684.4 $3,809.0 $4,008.6 $4,147.7 $4,241.8 $4,309.0 $4,414.6 $4,518.1 $4,617.8 $4,661.0
% of Revenue 56.37% 54.06% 62.90% 60.52% 236.88% 201.64% 292.73% 313.06% 59.15% 54.12% 53.70% 54.23% 54.15% 53.72% 53.84% 53.95% 54.06% 53.55%
Current Liabilities
Accounts Payable 225.3 255.7 257.4 239.8 454.4 388.3 329.3 646.2 646.2 289.2 305.9 314.3 322.0 329.6 336.0 344.2 351.0 357.7
Days Payable Outstanding 17 18 17 15 24 18 23 50 38 15 15 15 15 15 15 15 15 15 % of Revenue 4.64% 4.81% 4.61% 4.06% 26.32% 19.41% 25.30% 53.84% 10.37% 4.11% 4.10% 4.11% 4.11% 4.11% 4.10% 4.11% 4.11% 4.11%
Accrued Liabilities 556.7 564.2 514.0 427.3 566.8 500.8 507.0 469.6 469.6 482.0 509.9 523.9 536.6 549.4 560.0 573.6 585.1 596.1
Days Charges Outstanding 42 39 34 26 30 23 36 36 28 25 25 25 25 25 25 25 25 25 % of Revenue 11.46% 10.62% 9.21% 7.24% 32.84% 25.03% 38.95% 39.13% 7.54% 6.85% 6.83% 6.85% 6.85% 6.85% 6.83% 6.85% 6.85% 6.85%
Short Term Debt 480.5 838.5 294.9 666.3 974.2 619.6 352.4 731.8 731.8 599.5 449.9 399.9 909.7 725.2 728.1 757.2 748.9 715.4
Days Taxes Outstanding 36 58 19 41 51 28 25 56 43 31 22 19 42 33 33 33 32 30 % of Revenue 9.89% 15.79% 5.29% 11.29% 56.44% 30.97% 27.08% 60.97% 11.75% 8.52% 6.03% 5.23% 11.61% 9.04% 8.88% 9.04% 8.77% 8.22%
Current Portion of Long Term Debt 751.3 399.9 437.2 1176.1 848.8 944.9 1518.3 1011.3 1011.3 893.0 947.2 970.6 994.2 1017.9 1040.4 1062.8 1084.0 1104.5
% of Revenue 15.46% 7.53% 7.83% 19.94% 49.18% 47.23% 116.65% 37.69% 16.24% 12.69% 12.69% 12.69% 12.69% 12.69% 12.69% 12.69% 12.69% 12.69%
Total Current Liabilities $2,013.8 $2,058.3 $1,503.4 $2,509.6 $2,844.1 $2,453.6 $2,707.0 $2,858.9 $2,858.9 $2,263.8 $2,212.9 $2,208.7 $2,762.4 $2,622.1 $2,664.6 $2,737.8 $2,768.9 $2,773.6
Appendix 6 – Discounted Cash Flows Valuation Assumptions
Type Beta SE Weighting
1 Year Daily 1.18 0.10 0.00% 3 Year Weekly 1.12 0.14 0.00% Hamada Comps 0.91 5.00% 5 Year Weekly 1.54 0.09 5.00% Hamada ETF 1.03 10.00% 3 Year Daily 1.25 0.06 15.00% 5 Year Daily 1.42 0.04 20.00% Vasicek Comps 0.98 0.03 20.00% Vasicek ETF 1.04 0.02 25.00% HOG Beta 1.15
Method Final Price Target Weighting
DCF 80.03 70.00% Comparable Analysis 72.50 30.00% Price Target 77.77 Current Price 61.68 Undervalued 26.09% Q1 Q2 Q3 Q4
2010A 2011A 2012A 2013A 03/31/2014 A 06/31/2014 A 09/31/2014A 12/31/2014A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E EBITDA $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
EBITDA Margin 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% EBITDA Growth 23.85% 15.72% 12.97% (65.61%) 39.74% (44.12%) (30.65%) 586.86% 29.36% .56% (7.71%) (16.20%) 2.43% 19.40% 5.73% 5.64% 5.64%
2024E 2025E 2025E 2026E 2027E
$1,508.8 $1,609.7 $1,702.5 $1,784.9 $1,854.9
$680.4 $670.3 $654.6 $633.8 $608.2
7.60% 6.68% 5.76% 4.84% 3.92%
Intermediate Growth Rate:
Considerations
Avg. Industry Debt / Equity 0.00% Avg. Industry Tax Rate 0.00% Current Reinvestment Rate (124.95%) Reinvestment Rate in Year 2019E 2.67% Implied Return on Capital in Perpetuity 112.53% Terminal Value as a % of Total 54.0% Implied 2014A EBITDA Multiple 12.7x Implied Multiple in Year 2023E 4.7x Free Cash Flow Growth Rate in Year 2023E 8%
Appendix 7 –Sensitivity Analysis
Implied Price Undervalued/(Overvalued)
Terminal Growth Rate 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 Adjusted Beta 1.25 18.67% 18.67% 29.76% 44.47% 64.92% Adjusted Beta Implied Price
Terminal Growth Rate
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 WACC
Appendix A– Harley Davidson Motorcycle Prices
Superlow Iron 833 1200 Custom Superlow 1200T Forty-Eight Seventy-Two
Starting $ 8,249 $ 8,399 $ 10,649 $ 11,799 $ 10,749 $ 10,849
Mid Range $ 8,599 $ 8,774 $ 10,999 $ 12,149 $ 11,099 $ 11,224
High $ 8,799 $ 9,149 $ 11,199 $ 12,349 $ 11,199 $ 11,599
Street Bob Low Rider Wide Glide Fat Bob Swithcback
Starting $ 13,449 $ 14,199 $ 15,799 $ 15,699 $ 16,999
Mid Range $ 13,849 $ 14,599 $ 16,594 $ 15,899 $ 17,199
High $ 14,199 $ 14,949 $ 16,749 $ 16,099 $ 17,399
Fat Boy Fat Boy Lo. Softail Deluxe Heritage Softail Classic Softail Slim Breakout
Starting $ 17,699 $ 17,499 $ 18,099 $ 18,349 $ 15,899 $ 18,599
Mid Range $ 18,099 $ 17,899 $ 18,699 $ 18,749 $ 16,374 $ 19,199
High $ 18,499 $ 18,499 $ 19,299 $ 19,099 $ 16,849 $ 19,799
Night Rod Special V Rod Muscle Starting $ 16,549 $ 16,149
Mid Range $ 16,724 $ 16,499
High $ 16,899 $ 16,699
Road King Street Glide Street Glide Special Electra Glide Ultra Ultra Limited Road Glide Roade G Special Starting $ 18,449 $ 20,599 $ 22,899 $ 23,249 $ 26,099 $ 20,899 $ 23,199
Mid Range $ 18,974 $ 21,099 $ 23,149 $ 23,899 $ 26,749 $ 21,149 $ 23,449
High $ 19,499 $ 21,649 $ 23,399 $ 24,549 $ 27,399 $ 21,399 $ 23,699
Street Glide Limited Ultra Softail Deluxe
Starting $ 36,349 $ 39,349 $ 39,649 $ 28,999
Mid Range $ 36,349 $ 39,349 $ 39,649 $ 28,999
High $ 36,349 $ 39,349 $ 39,649 $ 28,999
500 750 Tri Glide Ultra Freewheeler
Street/Trike CVO Touring V Rod Softail Dyna Sportster
