On Tuesday, Harley-Davidson
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
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.
Mind you, I still think you're better off buying a 7 P/E stock like Ford
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.