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By kelbon
May 23, 2007

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Harley Davidson

Is currently trading at about -1.8 RMS according to mklein' s 16 year chart and hasn't traded this low, well in 16 years -- except briefly when it hit a low of $48 a share early in 2006.

With expected earning of $4.15 for 2007, at $63 per share that would give HOG a P/E of just over 15 -- inline with the last two years but still historically low and lower than the SP500.

HOG is going for about 12 times cash flow, also historically low except for early 2006. The other two times valuation was this cheap was in early 2003 and 1997.

Return on Equity for 2006 was 37.8% and Return on Total Capital was 29.2%. These were historic highs. Net profit margins have hovered around about 18% for the last three years and have been steadily rising over time. For instance they were around 10% in 1997.

Long term debt is less than annual net profit and less than the cash on Harley's books.

Since the stock became very reasonably priced in early 2005, management has been aggressively buying back shares -- reducing outstanding shares by about 20%. I see this as a positive as each slice of the pie is a little bigger and therefore shareholder friendly. However, some see share buybacks as artificially inflating earnings and a negative -- I don't, provided shares are repurchased when they are undervalued.

HOG also appears on the "MagicFormula Investing" website as one of the top 50 large-cap companies with a market cap of over $2 million -- with a Pre-tax Earning Yield of 10%.

The power of the Harley brand is hard to put a value on, but it undoubtedly provides an impressive moat. It's up there with Coca Cola as one of the worlds most recognized and unassailable brands.

Earnings growth is slowing, especially in the domestic market. The main worry about HOG seems to be the aging of their core-demographic. However, though this maybe a real issue at some time in the future, Value Line thinks that: "Harley will continue to benefit from favorable demographics over the 3 to 5 years ahead. The aging of the baby boomer population has worked to the company's advantage in recent years, and we look for this trend to continue." If you think about it the first of the boomers turned 60 this year and the 'boomer' period extends over about 15 years, making the youngest 45. Overseas sales continue to grow and with much more disposable income in Asia an iconic brand like Harley Davidson should be well positioned to benefit.

To me there are these indicators that HOG is a buy at $63 per share:
� It's trading near historically low p/e and price to cash flow coupled with historically high ROE and ROTC.
� It has a high score on the "MagicFormula" website.
� It's trading at a low RMS -- not quite -2, but pretty close.
� Iconic brand with a wide moat

It seems like a buy at this price and a hold for the next 3-5 years.

 


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