Investors Go Hog-Wild for Harley

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On Tuesday, Harley-Davidson (NYSE: HOG  ) reported improved operating profits and better motorcycle sales and guided toward higher shipments of motorcycles over the rest of this year. Profits came in at $0.81 per share -- and the shares are up well over 10% in response. Clearly, Harley is doing better than investors expected, and yes, its prospects look pretty good. But is Harley really worth 10% more than it was just Monday?

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 (NYSE: HMC  ) and Polaris (NYSE: PII  ) , and smaller-scale companies such as Arctic Cat (Nasdaq: ACAT  ) . Over the past 23 months, Harley's 16.2% operating profit margin is a full 370 basis points higher than what Polaris achieves, more than double Honda's take, and more than four times what Arctic Cat claws out of each revenue dollar.

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.

Foolish takeaway
Mind you, I still think you're better off buying a 7 P/E stock like Ford (NYSE: F  ) or General Motors (NYSE: GM  ) than 46 P/E Harley. All I'm saying today is that Harley's stock isn't quite as overvalued as it looks.

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.

Fool contributor Rich Smith holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (6)

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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 July 21, 2011, at 10:17 PM, stuckinamobile wrote:

    To educate, amuse, and enrich? I doubt it......More like to influence, mislead, and influence. Harely Davidson.....does not sell bikes or motorcycles. It delivers them and forces dealers to take what they give and when harley needs to window wash the numbers....Dealers take the heat. Why they are allowed to call a forced delivery a sale is criminal but just the type of crap that Notley fool jumps on and assumes they know what is going on. Harley slashed reorgnizaton costs and forgot to realize all the bad accounts from defaulting harley sales in order to post numbers that only you seem to like. Do you ever do any research? have you ever been accurate? It used to be AT LEAST amusing to read your hype and misinformation, but not anymore.

  • Report this Comment On July 22, 2011, at 11:23 PM, Turfscape wrote:

    Stuckinamobile, you are apparently stuck in 2006. HOG took the extraordinary measure of releasing 2012 models to deals early because dealers had run out of bikes to sell. Demand is up significantly, particularly among young adults (age 35 and under). Harley claimed the top spot for motorcycles with the young adult market about 2 or 3 years ago, and has been increasing their penetration into that market ever since.

    The moves that CEO Wandell has been making are the right moves. HOG is poised for solid growth for a 3 year period, at least.

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