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June 15, 1999

Harley-Davidson for Dad
by Bill Barker (TMFMax@aol.com)

Trading at $53 1/2 as of June 14, 1999

Now, I know what you're saying, Dad. You're a transplant surgeon, and when you hear Harley-Davidson, you immediately think of what you surgeons call "donorcycles." (Do witticisms like that really pass for comedy in the operating room?) Hey, of course I agree that riding a motorcycle without a helmet is crazy, but put your surgical memories aside for a moment. If you really look at the numbers for this company, I think you'll agree that those who aren't buying shares of Harley- Davidson (NYSE: HDI) also might want to have their heads examined.

Doesn't going from zero to sixty in a cool eleven years sound impressive to you? It should, because I'm talking about the stock, not some two-wheeled vehicle. In 1988, you could have picked up shares of Harley-Davidson for less than $1 (adjusted for splits), and those shares hit $60 earlier this year. To put that in perspective, you'll remember that my education cost you quite a bit. Let's just call it $100,000 so we don't make this too painful by calculating the full amount (not to mention that you also paid for a law school education that today -- well, you know what happened to that). If you'd bought about 2000 shares of Harley in 1988 for, oh, $1500 or so, you'd have more than that $100,000 worth of stock today!

Um... yeah... I know I didn't give you 2000 shares of Harley for Father's Day eleven years ago. I think I gave you a card, or a tie, or something -- but that's not my point, because it looks to me like investors in Harley still have a nice long ride in front of them. Six months ago, when I wrote the bull portion of a Dueling Fools bout, Harley was trading at $42 7/16. At that time, I figured the shares had an intrinsic value of $65. (Once you learn how to surf the Internet, Dad, you can check out my previous analysis.) The market, in a real rarity, ended up agreeing with my valuation and priced the shares at $64 by April.

So, do I still like the company at today's price? You betcha, because shares of Harley have cooled off just a shade since hitting that $64 level, and the quarterly earnings reports that the company has come out with in the last six months are even more impressive than expected. I figure the shares today have an intrinsic value of at least $70, and possibly much higher depending on your assumptions.

In that Duel I said, "There are, literally, no numbers that do not look spectacular for this company." Let me highlight just a few of the many, many numbers that are so impressive when looking over the results of this company:

-- Top line sales growth is a very smooth 15% per year.

-- Margins are constantly improving. In 1991, the gross margin was 27.3%. In 1995, it was 33.6%. Over the last twelve months, it has moved up to 38.2%.

-- Though the company provides plenty of stock options to its employees, it maintains a share repurchase program that effectively keeps share growth at zero. In 1992, there were 151.5 million shares outstanding. There are now about 153.4 million outstanding. The only reason there has been any growth at all is that no shares were repurchased last year as funds were dedicated to major new additions and improvements to its construction facilities. This year, the share repurchases will continue again.

-- The debt-to-equity ratio has improved to 27.2% last year from 33.9% in 1997, and is expected to be about 18% by 2000.

-- Earnings are improving by better than 20% per year, and that growth is unbelievably stable and predictable. Earnings per share over the decade look like this:

1991$0.26
1992$0.37
1993$0.50
1994$0.63
1995$0.73
1996$0.94
1997$1.13
1998$1.38
1999E$1.68
2000E$2.04

Keep stretching that out at 20% per year, and you'll come up with some pretty big numbers in no time.

One of the many reasons for such consistent growth is that Harley doesn't actually build motorcycles as fast as its customers want to buy them. Though Harley is constantly expanding its facilities and cranking out more bikes every year, the demand is much higher than Harley's production is intended to meet. This planned scarcity keeps the cachet of Harley's bikes extremely high, and purchasers who want a bike immediately can get one only by paying substantially above the list price -- which they're often willing to do.

Consider the fact that Harley doesn't even really advertise in a manner to attract any new owners. That's because Harley doesn't want to anger its existing customer base by drawing in any new purchasers when there already is a waiting list to get new bikes. This dedication to its existing customers has created a loyalty that is perhaps unmatched by any other company. As the Harley website puts it, "It's one thing to have people buy your products. It's another for them to tattoo your name on their bodies."

Harley is currently growing earnings at better than 20% per year, yet the shares only go for about 27 times next year's earnings. That's a pretty sweet price if you run Harley's earnings growth through any kind of a discounted cash flow model. I advise you to do that yourself, Dad, because different assumptions about how long that 20% growth can be sustained will produce very different valuations. Suffice it to say, however, that arriving at an intrinsic value of $70 per share would take nothing more than assuming 15% growth for 10 years, and 5% per year growth thereafter -- and both of those assumptions are substantially more cautious than history indicates will be achieved.

Harley-Davidson Company Information:
Trades on NYSE under symbol HDI
Harley-Davidson's website: www.harley-davidson.com
Current Quote
Harley-Davidson's Chart

Other Related Links:
Harley-Davidson Message Board

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* A Stock for Dad represents the opinion of one Fool and in no way should be taken as the opinion of either The Motley Fool, Inc., the company in question, or representative of anyone or anything else other than that specific Fool's thoughts.