Harley-Davidson For 25% Upside This Year

| About: Harley-Davidson, Inc. (HOG)

Harley-Davidson Inc. (NYSE:HOG) has done very well since hitting a low of $7.99 per share back in 2009. Since then, the company has rebounded nicely, gaining over 525% (Who else wishes they would have gone all-in during March of 2009?). However, I believe the company still has more growth to go, and could be a great investment over the next several years.

Harley-Davidson is the leading manufacturer of heavyweight motorcycles, and also sells parts, accessories, and clothing. Sales have rebounded in the past couple of years, although not to the levels of before the financial crisis. Nonetheless, 233,177 Harleys were sold in 2011, up 10.8% from the year before. I would be willing to bet that the company will report another double-digit gain in sales for 2012 during the earnings call later in the month.

HOG has an advantage in the form of the most fiercely loyal customers perhaps in the entire automotive industry. Most Harley riders have owned one (or several) of the company's bikes before. Therefore, a major point of the company's strategy is their focus on current owners. Speaking of which, the "average" Harley customer may not be quite what you expect. The company says that their average customer is a male over the age of 35 with an income above $85,000. The company maintains the majority of the market share in the heavyweight motorcycles arena, accounting for 55.7% of all new heavyweight registrations last year, and this has been on an uptrend over the past few years (see below).

However, going forward, most of HOG's growth will likely come from abroad. Last year, $1.51 billion of the company's sales were from international markets, compared to $1.36 billion the year before.

The company also has a very profitable financing business, Harley-Davidson Financial Services, which finances about 50% of the new motorcycles sold. The finance division earned $269 million in operating profits last year, about 25% of the company's total.

Like most other financial services businesses, Harley needed to raise some capital in 2009 to fund its financial division, so the company issued $600 million in new debt. In one of the best votes of confidence a business can get, Berkshire Hathaway (NYSE:BRK.B) bought $300 million worth, and still holds the debt today. The rest was purchased by Davis Selected Advisors, however HOG repurchased most of Davis' notes at the end of 2010.

Now, I'd like to briefly examine Harley's valuation, as analysts are projecting some serious growth for the company. HOG currently trades at 18.4 times 2012's expected earnings, which are up 17.2% from 2011. This sounds expensive until you realize that the consensus calls for earnings to increase to $3.41 and $3.87, or an 18.5% average annual growth rate over the three year period, more than justifying the multiple.

Assuming the consensus is accurate and that the P/E ratio remains constant (I believe it may even increase if the projected growth rate is accurate), I arrive at a 1-year target price of $62.74, or 25% above the current share price. Frequent readers of mine know that this is where I generally recommend a long term options trade, however in this case I think buying the stock is the best bet. I see HOG's growth continuing well into the future as the economy continues to rebound and the international sales grow. It is not unreasonable to envision Harley-Davidson as a $100 stock within the next several years if all continues to go well for the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.