Why Harley-Davidson, Inc. Stock Hit Full Throttle After Its Earnings Report

Shares of Harley-Davidson, Inc. (NYSE: HOG  ) surged in early Tuesday trading, racing ahead from $67.54 to $72.86 at last quote. The surge was in response to a Q1 earnings report that showed the company had grown retail sales 6%, shipments 7%, and revenues 10% over the past three months.


Source: Harley Davidson

Running down the quarter's highlights:

  • Sales increased 10% to $1.73 billion, about $200 million more than analysts had predicted.
  • Profits surged 22%, to $1.21 per share -- also ahead of estimates.
  • Operating cash flow hit $203.6 million (versus negative cash flow in the year-ago quarter).
  • Subtracting capital expenditures of $25.9 million, free cash flow was $177.7 million, about 67% of reported net income.

Dealer sales to consumers are growing. Shipments portending future sales are growing even faster. And revenues are growing fastest of all, showing that the Harley brand retains significant pricing power.

What's behind the success? According to CEO Keith Wandell, "Project RUSHMORE motorcycles were in high demand in the quarter and we began shipping the Harley-Davidson Street 750 and 500 into select markets."

The first part of that boast, Project RUSHMORE, refers to Harley's wholesale revamp of how it develops and sells its bikes, aiming to boost production capacity, and cut the time from when a new motorcycle is first envisioned to when it hits the market nearly in half -- from a five and a half year development cycle down to just three years. The second part refers to Harley's nearly as ambitious plan to revamp its image as a builder of bikes for "wealthy, middle-aged American white men," and open new markets for smaller bikes, affordable to less affluent buyers around the world, with the ultimate aim of getting 40% of its global revenues from outside U.S. borders.

That latter initiative seems to be working out especially well, with international sales up 8% in Europe, 9% in Latin America, and an astounding 20% in Asia in the fiscal first quarter. For context, unit sales in the U.S. increased only 3%.

Even in the U.S., the news wasn't so bad. Sales growth of 3% in the middle of a cold, cold winter, after all, is nothing to (ahem) sneeze at. And it's especially gratifying to hear that IHS Automotive data is saying that last year Harley retained its No. 1 market share not only among "Caucasian men age 35-plus," but among the company's new target market, "young adults age 18-34, women, African-Americans and Hispanics" -- a demographic Harley clearly labels its "outreach" customers. Says Harley, "Retail sales... to U.S. outreach customers grew at more than twice the rate of sales growth to core customers in 2013." 

Valuation
Final point: Harley's business is going full out, but what about its stock? How does that look to investors?

Well, at just over 20 times earnings today, paying a 1.7% dividend yield, and projected to grow at 16%, I'd have to say the stock's looking not too shabby. When you consider further that Harley's trailing results show the company to be generating significantly more free cash flow ($1.1 billion) over the past year than it reported as net income ($776 million) -- and that, as a result, the stock is selling for less than 15 times free cash flow even after this morning's jump in stock price -- the stock looks even more attractive.

Long story short, investors who bid up Harley shares in reaction to today's news are right on the money.  

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