In this article, let's take a look at Harley-Davidson, Inc. (HOG, Financial), a $13.69 billion market cap company that is a leading maker of heavyweight motorcycles also produces a line of motorcycle parts and accessories.
New CEO
Due to the retirement of current CEO, Matt Levatich will become the company's president and CEO on May 1. Levatich has been Harley-Davidson's president and chief operating officer since 2009. This is a key position in order to maintain sales and operating margins at recent year levels. Some recent data showed that there has been some share weakness. Last year, domestic sales increased less than 1%, while the industry expanded 2.5% and the European sales rose 8% versus a 13% of the industry. This constitutes a great challenge to Levatich in the upcoming future.
Increasing dividend
The company has generated strong free cash flow in the last years. At 2014 level, we can estimate more than $5 billion of cumulative free cash flow over the next five years. This is very important to continue with the dividend policy. Harley-Davidson stock dividend yield is close to 5-year high, which is a gurufocus good sign.
A few days ago, the board of directors has approved a cash dividend of $0.31 per share for the first quarter of 2015, an increase of 13% compared to the previous dividend of $0.275 per share.
Flexibility
The firm must continue adapting to the changing demographic demands of consumers. Although the core consumer is a Caucasian man of 35 or more, we believe other targets like African-Americans, Hispanics, women and youths are becoming more important over the next decade.
Revenues, margins and profitability
Looking at profitability, revenues grew by 0.79% and led earnings per share slightly increased in the most recent quarter compared to the same quarter a year ago ($0.35 vs $0.34). During the past fiscal year, the company increased its bottom line. It earned $3.87 versus $3.27 in the previous year. This year, Wall Street expects an improvement in earnings ($4.29 versus $3.87).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| HOG | Harley Davidson | 26.85 |
| WGO | Winnebago Industries | 23.55 |
| GM | General Motors | 9.62 |
| TSLA | Tesla Motors | -25.0 |
| Â | Industry Median | 9.97 |
The company has a current ROE of 26.85% which is higher than the industry mean and the ones exhibit by Tesla Motors (TSLA, Financial) and General Motors (GM, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Winnebago Industries (WGO, Financial) could be other option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
http://www.gurufocus.com/chart/HOG#&serie=,,id:ROE,s:HOG&log=0&per=0"> src="http://chart.gurufocus.com/1423607512330.png" />
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 16.3x, trading at a discount compared to an average of 17.8x for the industry. To use another metric, its price-to-book ratio of 4.2x indicates a premium versus the industry average of 1.65x while the price-to-sales ratio of 2.3x is above the industry average of 0.7x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. Also, the company has demonstrated a pattern of positive earnings per share growth over the past years.If you had invested $10.000 five years ago, today you could have $29.117, which represents a 23.9% compound annual growth rate (CAGR).
Final comment
I feel bullish on this stock because it has more than a century of experience manufacturing large-displacement bikes, good brand strength and a dominant position in the industry.
For the reasons discussed in this article, I would recommend to add this stock to long-term portfolios. Hedge fund gurus like Steven Cohen (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
