On Tuesday, Harley-Davidson
Yes, it is. And I'll tell you why.
Price is what you pay; value is what you have to look for
I'll admit that at first glance, the reaction to Harley's Q2 report looks a bit overdone. While Harley exceeded expectations, the stock's rocketing to a 46 P/E ratio, when weighed against the mere 12% long-term growth estimates for the company, seems a bit optimistic. But consider what's going on behind the scenes at Harley-Davidson:
- Revenues in the second quarter rose 15% year over year. Most of the growth came from bike sales (up 18%), as opposed to financing profits.
- Inventories increased 14%, while accounts receivable climbed just 7%. In each case, the increase was slower than Harley's revenue growth -- so less cash is being tied up in unsold inventories and uncollected bills.
- Result: Free cash flow for the past 12 months now comes to $667 million, or nearly twice Harley's reported $352 million net income.
Harley's also outclassing its rivals -- both direct competitors for motorcycle sales such as Honda
And now Harley's poised to grow those revenues even more. This year, the company plans to ship perhaps 235,000 motorcycles worldwide, a near-12% volume improvement over last year. Just factoring in inflation, this suggests that Harley will exceed long-term estimates of 12% growth this year, so that even at a price-to-free cash flow ratio of 16, the stock may not be overvalued.
Mind you, I still think you're better off buying a 7 P/E stock like Ford
Can Harley-Davidson grow fast enough to turn itself into the kind of bargain even Rich will have to acknowledge? Add it to your Fool Watchlist, and find out.