One week ago, Standpoint Research dumped cold water on the theory that Harley-Davidson
Oh, I know a lot of investors disagree with me on this one. Harley shares sold off by more than 6% today after the company detailed sliding third-quarter sales and how it needed a boost from its finance division to push earnings above target. But from where I sit, the lower stock price only makes this HOG look prettier. Here's why.
Harley's non-financial services revenues dropped 2% in Q3, which doesn't look good when set up against the double-digit revenue gains that its four-wheeled kin Toyota
And yet, Harley did raise the floor on its predictions for this year's motorcycle shipments (from 201,000 units up to 207,000). Meanwhile, like General Electric
Long term, Wall Street analysts expect Harley will get the rest of its growth engine back in gear and increase earnings at an annual 10% clip over the next half-decade. This growth rate -- while it may be a while in coming -- compares favorably to the valuation I see on the stock today. Consider: With nearly $1.2 billion in cash flow created so far this year, Harley's on track to deliver cash from operations in the neighborhood of $1.6 billion this year. Subtract out more muted capital spending plans ($200 million or so through year's end) and what you're left with is a company that could easily generate $1.4 billion in free cash flow this year.
Simply put: To me, paying 9.2 times enterprise value to free cash flow ratio for a 10% grower looks like a good value proposition. Toss in a tidy 1.2% cash-back from the dividend yield, and I would not be a bit surprised to see Harley -- a stock that has already nearly doubled the S&P 500's returns so far this year -- continue to outperform in 2010 and beyond.