Gathering New Information about Stocks, Health, and Sports

Introduction

Harley-Davidson, Inc (HOG) is an $11.28 billion company in the recreational product industry. Market capitalization competitors in this industry include Mattel, Hasbro, and Brunswick. The recreational industry is down 9.31% over the past year compared to the S&P 500 which is up 6.29% during the same period. Over the past month the industry has been up 17.28%, while the S&P 500 has been down 1.20%. After a strong sell-off earlier this year, there is a strong potential for recreationally-based companies to grow. Evidence comes from a potentially strong holiday season. Harley-Davidson's growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Harley-Davidson produces. Consumers already know about Harley-Davidson�s strong relationship with motorcycles. More specifically, this company, �operates in two segments: the Motorcycles & Related Products segment and the Financial Services segment,� according to Reuters. The variety of businesses helps Harley-Davidson spread its risk and control exposure to different segments.

In detail, the Motorcycle segment�s purpose is �to design and manufacture motorcycles for the heavyweight market and sell them at wholesale.� Over 80% of all Harley-Davidson revenue comes from this type of work. However, Harley-Davidson does not produce only one type of vehicle. There are five distinct motorcycles produced including �Touring, Dyna, Softail, Sportster and VRSC.� Harley-Davidson uses quality products for these motorcycles under Buell manufacturing to differentiate itself from its competitors. The company also focuses on four segments of the market, �standard, performance, custom, and touring� to achieve even more profitability. This segment targets retail customers through dealer promotions, events, and standard advertising. The company also advertises through sponsored events.

The next segment, financial services, engages in the �business of financing and servicing wholesale inventory receivables and consumer retail loans� process. There is also a small part of this segment which helps with insurance. Also because Harley-Davidson operates in countries outside the United States, there is some more growth opportunity, given the U.S.�s low dollar valuation.

Growth

Harley-Davidson�s growth has been solid the past fiscal year. It�s true that its revenue growth of 4.13% is below the industry and five year average figures, but there is still strong potential for higher growth. First, this company is the market leader in its industry. Last year, revenue exceeded $6.19 billion. Having strong sales increases every year will be difficult for any company. However, Harley-Davidson actually managed to exceed expectations the past five years. The company currently has a five year average 11.51%. The industry�s average is only 8.84%. Therefore, there is precedence of strong financial performance, and once Harley-Davidson can compete in a better economic environment (with low commodity prices), the company will regain strong growth and higher share prices. The same sentiment also applies to earnings growth, which at 3.51%, is also below the industry�s current average. However, the five year average of 22.43% leads to credence for positive change in the future.

Nevertheless, there are still excellent fundamentals apparent in the current fiscal year. First, even with revenue and earnings growth below the general industry, Harley-Davidson surprisingly still beats competitors such as Brunswick, which saw -1.23% and -61.68% growth rates respectively. More importantly, Harley-Davidson has terrific margins. Even though this company saw a dramatic decrease in overall revenue and earnings growth, Harley-Davidson still managed to post a 38.55% gross margin this past year, up from the five year average of 38.35%. This figure beats out competitor Brunswick�s gross margin of 20.62%. Moreover, operating margins also remained stable at 24.37% this past year and were actually higher than the industry�s average at 17.24% and other competitor averages. Even more impressive was Harley-Davidson�s net profit margin. The company�s 15.99% margin was relatively stable compared to the five year average but was also 42% higher than the industry�s respective figure, despite the company�s poor growth performance. In addition, neither Mattel (9.47%), Hasbro (8.41%), nor Brunswick (1.99%) produced more pennies for every revenue dollar than Harley-Davidson.

Moreover, Harley-Davidson also has positive ROE sentiment. Harley-Davidson�s ROE for the past fiscal year was 38.40%. This number was above the industry�s average of 27.02% and the company�s five year average of 30.79%. Moreover, Harley-Davidson�s ROE also beat Mattel�s (23.93%), Hasbro�s (22.20%), and Brunswick�s (5.67%) respective figures. From this analysis, two conclusions emerge. First, Harley-Davidson is making excellent use of its shareholder equity (stock and net income). This encourages more investors to purchase shares. Moreover, a higher ROE may indicate management sentiment to buy back stock�a move very favorable to investors. Harley-Davidson also controls its balance sheet very well with an industry-beating ROA of 20.00% and an industry-beating ROI of 25.60%. Therefore, there are very bullish indicators regarding Harley-Davidson�s growth, despite an underperforming sales performance this year.

Valuation

Despite the positive, forward-looking, sentiment for Harley-Davidson, investors have not placed much value into the company. This is a bullish sign, considering there is a high potential the company�s further numbers will be strong. According to Reuters, Harley-Davidson has a P/E ratio (forward) of 12.72. This number is below the industry�s current ratio of 14.40. In addition, the company�s price to sales ratio of 2.02 is also near the industry�s current multiple of 1.73. Looking at competitors, none of Brunswick, Mattel, or Hasbro has an earnings multiple below Harley-Davidsons, despite unfavorable news for these companies. This is especially surprising, because the company�s PEG ratio at 1.10 is below all other competitors mentioned in this article. Therefore, there must be some inexplicable reason why investors have not found Harley-Davidson a good portfolio investment. But once the company starts to post higher earnings, there is a strong possibility the company�s share price will follow suit.

Efficiency

Harley-Davidson is efficient. The company's receivable turnover of 14.43 is much stronger compared to the industry�s 9.82 average. Even though the company operates a high-priced product corporation, Harley-Davidson still manages to collect cash from consumers every 25 days. Moreover, inventory turnover is above the industry average at 11.68, and asset turnover is also strong at 1.25. In terms of liquidation, Harley-Davidson�s current ratio is 2.05�higher than the industry average of 1.42. This statistic coincides with the company�s low debt to equity ratio of 0.52. Some investors may question low debt financing considering recently low growth, but high equity percentages have been beneficial to the company before, and probably will be beneficial to the company in the future.

In addition, Harley-Davidson provides a generous dividend yield. The company's 2.50% yield is higher than Hasbro�s, which offers a 2.36% rate. Institutional investors have recognized the benefits of Harley-Davidson's dividend yield and other fundamentals. Currently, institutions own 76.05% of all Harley-Davidson shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

Harley-Davidson has not performed well in 2007. The company�s share price has dropped 30.54% year-to-date. However, the low amount has some positive implications. There seems to be some resistance at the 45 dollar share price range. The last time Harley-Davidson reached this amount (2005), the company rebounded and appreciated 50%. There is a possibility a similar situation could occur in the future.

More specific to the current month, Harley-Davidson illustrates strong technical signals. The 50 day SMA and 50 day EMA are both linear over the past three months. Parabolic SAR did recently fall below the market price, but a potential outbreak will boast the SAR upwards. The company is a little undervalued compared to the RSI index at 50.21, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Harley-Davidson according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Harley-Davidson is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
December 7th, 2007