Is Harley-Davidson the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Harley-Davidson (NYSE: HOG  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Harley-Davidson.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (3%) fail
  1-Year Revenue Growth > 12% (15.7%) fail
Margins Gross Margin > 35% 31.8% fail
  Net Margin > 15% (1.9%) fail
Balance Sheet Debt to Equity < 50% 306.2% fail
  Current Ratio > 1.3 1.93 pass
Opportunities Return on Equity > 15% 5.3% fail
Valuation Normalized P/E < 20 27.05 fail
Dividends Current Yield > 2% 1.2% fail
  5-Year Dividend Growth > 10% (4.7%) fail
       
  Total Score   1 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With just a single point, Harley-Davidson is about as far from perfect as you can get. Given the challenges that the company is facing, though, that's not terribly surprising.

A few years back, many investors believed that the aging baby-boom generation would help boost Harley's prospects as they retired and had more leisure time to pursue their dream hobbies. In response, Harley expanded its production capacity at what proved to be exactly the wrong time, as the financial crisis took a big bite out of new retirees' savings. That had a big impact on leisure vehicles of all kinds; ATV maker Polaris Industries (NYSE: PII  ) and RV trailer company Winnebago (NYSE: WGO  ) saw sales drop precipitously during the recession.

Now, the company is trying to cut costs and restructure its business to take advantage of its hugely popular brand. But with its core demographic aging and younger riders looking to competitors Honda (NYSE: HMC  ) and Kawasaki for their sportier bikes, Harley needs to do a lot more to connect with a new generation of riders. And with a heavy debt load, it needs to act quickly, or else Harley might find itself riding off into the sunset.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Want to own the perfect stock? Click here to read our special report, 5 Stocks the Motley Fool Owns -- And You Should Too.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 15, 2010, at 4:28 PM, Turfscape wrote:

    Wow...with this article, all I can say is "welcome to 2006". Maybe someday you'll join us in 2010.

    Issue #1: "Now, the company is trying to cut costs and restructure its business to take advantage of its hugely popular brand"

    Well, no...they did that two years ago. Costs have been cut. Business has been restructured. Looking at the Q2 earnings, the right moves were made, and results are starting to show.

    Issue #2: "But with its core demographic aging and younger riders looking to competitors Honda and Kawasaki for their sportier bikes, Harley needs to do a lot more to connect with a new generation of riders."

    Any proof to back that up? R.L. Polk determined that HOG owns the young adult market in the U.S. for on-road motorcycles, as has since late '08. HOG market share increased in the economic downturn. Honda and Kawasaki (and Yamaha and others) all lost market share, suffering a more severe downturn that HOG. Additionally, the HOG average rider age has gone down two years running. Their audience is getting younger. The recent releases of bikes like Nightster, Iron 883 and Forty-Eight have been wildly popular with young adults. It's a fallacy to believe that young rider = crotch-rocket. Sadly, its the most oft-repeated fallacy by non-rider, financial types.

    A few further points:

    Trike sales have been strong (many dealerships can't keep them in stock) creating a new direct market for HOG.

    Lastly, HOG has secured new, long-term contracts with the Unions at all its production facilities, securing lower manufacturing costs and greater flexibility for the next several years.

    Your backward looking analysis is a very poor approach for a company in transition or having recently completed a transition. Like they say, history is no guarantee of future results.

    But, I suppose we'll see eating crow on Tuesday (Q3 earnings).

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