Market Overview

Earnings Analysis: Harley-Davidson

Harley-Davidson (NYSE: HOG) reports preliminary financial results for the quarter ended 2012-09-30.

Harley-Davidson Inc. recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.

Harley-Davidson Inc.'s analysis versus peers uses the following peer-set: Honda Motor Co. Ltd. ADS (HMC), Bayerische Motorenwerke AG BMW (BAMXF), Bajaj Auto Ltd. (532977-IN), Hero MotoCorp Ltd. (500182-IN), Polaris Industries Inc. (PII), Yamaha Motor Co. Ltd. (7272-JP) and Piaggio & C.S.p.A. (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.

Trend Charts

Graph of Revenues Trend for Harley-Davidson Inc. (NYSE: <a class=HOG)" class="size-full wp-image-3965 alignnone" data-mce-src="http://www.capitalcube.com/wp-content/uploads/2012/10/5aa4127d57f9eec3c02c1ff237073f8c.png" height="288" src="http://www.capitalcube.com/wp-content/uploads/2012/10/5aa4127d57f9eec3c02c1ff237073f8c.png" title="Revenues Trend Quarterly" width="348" />
Graph of Revenues Trend for Harley-Davidson Inc. (NYSE: <a class=HOG)" class="alignnone size-full wp-image-3956" data-mce-src="http://www.capitalcube.com/wp-content/uploads/2012/10/64b2199751e8f174681ccf283556f1cf.png" height="288" src="http://www.capitalcube.com/wp-content/uploads/2012/10/64b2199751e8f174681ccf283556f1cf.png" title="Revenues Trend Annual" width="348" />
Graph of Net Margin Trend for Harley-Davidson Inc. (NYSE: <a class=HOG)" class="alignnone size-full wp-image-3955" data-mce-src="http://www.capitalcube.com/wp-content/uploads/2012/10/74df58d585e68e88d0026e80d3618b71.png" height="288" src="http://www.capitalcube.com/wp-content/uploads/2012/10/74df58d585e68e88d0026e80d3618b71.png" title="Net Margin Trend Quarterly" width="348" />
Graph of Net Margin Trend for Harley-Davidson Inc. (NYSE: <a class=HOG)" class="alignnone size-full wp-image-3959" data-mce-src="http://www.capitalcube.com/wp-content/uploads/2012/10/4211166cbc3aca093888073773503b5a.png" height="288" src="http://www.capitalcube.com/wp-content/uploads/2012/10/4211166cbc3aca093888073773503b5a.png" title="Net Margin Trend Annual" width="348" />
Graph of Accruals Trend (% revenues, Quarterly) for Harley-Davidson Inc. (NYSE: <a class=HOG)" class="alignnone size-full wp-image-3957" data-mce-src="http://www.capitalcube.com/wp-content/uploads/2012/10/9db1d199a830a8b75727f0db65841291.png" height="288" src="http://www.capitalcube.com/wp-content/uploads/2012/10/9db1d199a830a8b75727f0db65841291.png" title="Accruals Trend Quarterly" width="348" />
Graph of Accruals Trend (% revenues, Annual or TTM) for Harley-Davidson Inc. (NYSE: <a class=HOG)" class="alignnone size-full wp-image-3960" data-mce-src="http://www.capitalcube.com/wp-content/uploads/2012/10/8251e41d777365db060771038ba8ed60.png" height="288" src="http://www.capitalcube.com/wp-content/uploads/2012/10/8251e41d777365db060771038ba8ed60.png" title="Accruals Trend Annual" width="348" />

Company Profile

Harley-Davidson, Inc. manufactures and sells heavyweight motorcycles as well as a line of motorcycle parts, accessories, general merchandise and related services. It manufactures five families of motorcycles: Touring, Dyna, Softail, Sportster, and V-Rod. It also provides wholesale and retail financing and insurance programs primarily to Harley-Davidson dealers and customers. The company operates through two principal business segments: Motorcycles & Related Products and Financial Services. The Motorcycles & Related Products segment designs, manufactures and sells at wholesale heavyweight cruiser and touring motorcycles as well as a line of motorcycle parts, accessories, general merchandise and related services. It includes the Harley-Davidson and Buell product lines. The Financial Services segment is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans, primarily for the purchase of Harley-Davidson motorcycles. It conducts business principally in the United States and Canada. Harley-Davidson was founded by William Sylvester Harley, Arthur Davidson, Walter C. Davidson and William A. Davidson in 1903 and is headquartered in Milwaukee, WI.

Disclaimer

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