Harley Davidson (HOG) Is a Stock Worth Considering After Recent Sell-Off

Currently the US stock market seems expensive and most quality/defensive companies are selling for between 18 and 23 times free cash flow/earnings. In this type of environment a strategy our firm utilizes to identify investment opportunities incorporates screening for quality companies whose stocks have recently stumbled due to transitory reasons. One of the initial stocks that hit our radar was Harley Davidson

. Almost everyone in America (and an increasing amount of people across the world) are familiar with the company. Harley Davidson is one of the largest and well known motorcycle companies in the world. It is a storied, well established, and aspirational brand that garners a large amount of respect in the industry and has a ‘cult-like' following among its customers. This is the type of company you want to own…especially after a large drop in its stock price. The stock is off around 20% over the past 5 months, and unchanged in the last 2 years. Although in isolation these performance numbers mean nothing, it is a good starting point for further research to see if this recent weakness has created a long term opportunity. There does seem to be multiple reasons to invest in Harley, especially when compared with other investment options: • Harley Davidson is a well-respected industry leader and an aspirational company with an established cult like following. This fact often is enough to command a premium valuation in the market • The stock has a 2.2% dividend yield which is slightly above the S&P 500 yield of 1.9%. This 2.2% distribution represents about a 30% payout ratio which means there is the possibility of solid dividend growth in the future • With a stock price of just under $57/share the company trades at a trailing P/E of about 14.5 (well below average for the market) and a price to ‘sustainable free cash flow' ratio of about 17 (also below average). • Using a conservative DCF model, assuming free cash flow grows at a 2 to 3 percent annual pace the stock looks currently priced to deliver around 8% annual total returns going forward • The company is well aware that it's traditional ‘core' of customers (American white males aged 35-65) is not a growing segment. This being the case Harley is proactively targeting many new demographics for growth including international, female, young riders (18-35), and other minorities Overall investing in Harley represents an opportunity to own a quality well established industry leader at a reasonable price. Accepting an 8 percent total annual return in the future on a stock is not ordinarily considered a ‘bargain'. When compared to the alternatives of 5-6 annual returns on other quality equities, a little over 2 percent for a 10 year Treasury, or essentially nothing on cash it however becomes very appealing. Eric Mancini,CFP is the director of investment research at Traphagen Financial Group, an independent investment advisory firm located in northern New Jersey (www.tfgllc.com).