Harley-Davidson Inc.’s analysis versus peers uses the following peer-set: Honda Motor Co Ltd (NYSE:HMC), BAYERISCHE MOTORENWRK (PINK:BAMXF), Bajaj Auto Ltd (BOM:532977), Hero Motocorp Ltd (BOM:500182), Polaris Industries Inc. (NYSE:PII), Yamaha Motor Co., Ltd. (TYO:7272) and Piaggio & C. SpA (BIT:PIA). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
| Quarterly (USD million) | 2012-09-30 | 2012-06-30 | 2012-03-31 | 2011-12-31 | 2011-09-30 |
|---|---|---|---|---|---|
| Revenues | 1,250.3 | 1,729.7 | 1,429.7 | 1,183.9 | 1,397.3 |
| Revenue Growth % | (27.7) | 21.0 | 20.8 | (15.3) | (7.2) |
| Net Income | 134.0 | 247.3 | 172.0 | 54.6 | 183.6 |
| Net Income Growth % | (45.8) | 43.7 | 214.8 | (70.2) | (3.7) |
| Net Margin % | 10.7 | 14.3 | 12.0 | 4.6 | 13.1 |
| ROE % (Annualized) | 20.0 | 37.7 | 27.6 | 8.7 | 28.6 |
| ROA % (Annualized) | 5.5 | 10.5 | 7.1 | 2.3 | 7.7 |
Valuation Drivers
Harley-Davidson Inc. trades at a lower Price/Book multiple (3.7) than its peer median (6.3). The market expects HOG-US to grow at about the same rate as its chosen peers (PE of 16.3 compared to peer median of 15.7) and to maintain the peer median return (ROE of 22.9%) it currently generates.
The company’s relatively high profit margins (currently 10.9% vs. peer median of 7.7%) are burdened by asset inefficiency with asset turns of 0.6x compared to the peer median of 1.1x. Overall, this suggests a margin driven operating model relative to its peers. HOG-US’s net margin continues to trend upward and is above (but within one standard deviation of) its five-year average net margin of 8.7%.
Economic Moat
The company’s revenues performance is worse than its peer median (year-on-year change revenue of 9.3%) but its earnings have been relatively good — annual earnings changed by 111.1% compared to the peer median of 35.3%, implying that relative to peers, it is focused on earnings and/or selective about what top-line growth opportunities it pursues. HOG-US currently converts every 1% of change in revenue into 11.9% of change in annual reported earnings.
HOG-US’s return on assets is above its peer median both in the current period (6.2% vs. peer median 5.0%) and also over the past five years (7.2% vs. peer median 5.2%). This performance suggests that the company’s relatively high operating returns are sustainable.
The company’s comparatively healthy gross margin of 40.0% versus peer median of 26.9% suggests that it has a differentiated strategy with pricing advantages. Further, HOG-US’s bottom-line operating performance is better than peer median (pre-tax margins of 16.8% compared to peer median 10.8%) suggesting relatively tight control on operating costs.
Growth & Investment Strategy
While HOG-US’s revenues growth has been below the peer median in the last few years (-3.8% vs. 3.8% respectively for the past three years), the market still gives the stock an about peer median PE ratio of 16.3. The market seems to see the company as a long-term strategic bet.
HOG-US’s annualized rate of change in capital of 10.5% over the past three years is greater than the peer median of 8.2%. However, this investment level has only generated a peer median return on capital of 3.7% averaged over the same three years. This median return on an above median capital investment suggests the company is overinvesting.
Earnings Quality
HOG-US has reported relatively strong net income margin for the last twelve months (10.9% vs. peer median of 7.7%). This margin performance combined with relatively high accruals (1.6% vs. peer median of -0.2%) suggests possible conservative accounting and an understatement of its reported net income.
HOG-US’s accruals over the last twelve months are around zero. However, this modestly positive level is also greater than the peer median which suggests some amount of building of reserves.
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