Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Investors Go Hog Wild for Harley-Davidson

By Rich Smith - Jul 25, 2015 at 8:03AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Are they right? Or are Harley-Davidson shares about to run out of gas?


Harley-Davidson 2015 Fat Boy -- it's a classic. So's the stock. Image source: Harley-Davidson.

Harley-Davidson ( HOG 1.75% ) reported earnings for fiscal Q2 2015 on Tuesday. The fact that the stock was up 7.5% just two days later probably tells you all you need to know about how good the results were.

But just in case it doesn't, here are the details. In Q2 2015, Harley-Davidson reported:

  • A 9% drop in consolidated revenue to $1.82 billion.
  • An 11% decline in profits, which were just $1.44 per share.
  • A 1.4% reduction in worldwide new motorcycle sales through its dealers.

That doesn't exactly sound like "good" news. So, why are investors so excited?

Well, the short answer is that Harley "beat earnings" with numbers that, while down year over year, nonetheless exceeded the numbers analysts had been expecting it to produce. According to analysts, Harley was only supposed to deliver $1.39 per share in profits, and $1.7 billion in sales.

The longer answer, though, is that after beating expectations in Q2, Harley looks poised to do so again in more quarters to come.

What's ahead for Harley
While admitting that motorcycle sales were down in Q2, Harley notes that it decided on its own "to lower motorcycle shipments from initial projections for 2015 in light of currency-driven competitive pressures in the U.S. and the company's commitment to manage supply in line with demand."

Translation: Harley wanted to preserve profits rather than swamp the market with unwanted bikes.

Additionally, Harley management noted that its sales "gained momentum as the quarter progressed... both in the U.S. and internationally." Accordingly, the company is returning to its growth path sooner than expected, and it says it will end up shipping between 276,000 and 281,000 motorcycles by the time the year is done -- not a decrease in sales, but a 2%-4% increase in comparison to 2014 numbers.

Harley says it will maintain profit margins (18%-19% operating margins) on those growing sales while holding capital spending to previously promised levels of about $250 million.

Putting a sticker price on Harley-Davidson stock
So, what does this all mean for investors? Consider: In 2014, Harley-Davidson collected $6.2 billion in revenues, earned about 20.6% in operating margins on those revenues (per data from S&P Capital IQ), and netted $845 million in profit as a result. If Harley earns profit margins of, say, 18.5% on this year's sales, then each revenue dollar will be worth about 10% less to Harley than it was worth back when the company had a 20.6% margin. Factor in 3% growth in sales volumes, and 10% minus 3% implies about a 7% reduction in net profit for the year.

Call it $785 million on the bottom line.

The upshot for investors
Divided into Harley's $12.3 billion market capitalization, $785 million profit works out to a P/E ratio of about 15.7 on Harley-Davidson stock. Factoring in a 2.3% dividend yield, and 12.3% projected long-term earnings growth (per Yahoo! Finance), you're therefore paying about 15.7 times earnings for a 14.6% total return on HOG shares today.

That's not unreasonably expensive.

When you consider further that at last report, Harley-Davidson was generating positive free cash flow of $974 million annually -- 19% more than it's reporting as net income -- why, Harley-Davidson shares might even be described as "cheap."

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Harley-Davidson, Inc. Stock Quote
Harley-Davidson, Inc.
HOG
$38.34 (1.75%) $0.66

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
633%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/07/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.