Harley Davidson: Strong Q1, But Upside Has Been Realized

May. 4.12 | About: Harley-Davidson, Inc. (HOG)

Harley Davidson (NYSE:HOG) released strong Q1 numbers on volume and margin contribution for bikes, and has rallied 37% YTD vs. 11% for the S&P 500. Previously I advocated taking a long position the stock and targeted a price of $50.

In Q1 the positive news on margin and volumes for 2012 is encouraging and 2013 will likely be strong too, but Harley Davidson at $53 now appears close to fair value. I'm not rushing to sell, as the stock may trend higher on positive news flow and momentum, but the upside present earlier in the year is now realized and I would not add new money without a significant change in outlook.

Growth accelerating

As I wrote previously, management's estimates for Q1 looked conservative, but the actual results were even stronger than I expected. With quarter on quarter revenue growth exceeding 20% lead by 25.5% US growth and EMEA the only region not showing growth due with a -1.1% decline to softness in the UK and southern Europe.

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Guidance for FY12 volume now looks ultra conservative, implies dramatic slowdown from 20% growth

Harley Davidson is now guiding to 245,000-250,000 for 2012 (this guidance is up 5,000 from Q4). That implies 2.2% growth for the remaining three quarters of the year, which seems extremely conservative in the context of accelerating growth. The one wild card is the York plant ERP implementation scheduled for Q3 which could disrupt the supply chain, but that is more likely to alter the pattern of growth between quarters rather than ultimately weaken end user demand.

Gross margin strong

Gross margin was notably strong with the incremental contribution in Q1 suggesting each incremental bike sale adding $7,000 to operating income.

Implications for the stock

Based on Q1 results, I estimate net income at $731M for 2012 based on the deltas to 2011 shown below. The main driver is volume growth, which I estimate at 15% year on year, significantly ahead of company guidance of 6%.

2011 Net Income ($,M)

548

Restructuring inefficiencies

-32

York ERP risk in Q3

-20

lower restructuring costs year on year

+13

savings from restructuring year on year

+65

volume growth (assumes 15% unit growth year on year)

+157

2012 Net Income (est.)

731

year on year growth

33%

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Based on $731M of earnings and a range of plausible p/e multiples, HOG's current valuation of $53 appears to offer little upside.

P/E multiple Stock price
14 $44
16 $50
18 $56
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Conclusion

Harley has had a good run, with strong Q1 results, but its hard to see meaningful upside in the stock at the currently valuation.

Disclosure: I am long HOG.

Additional disclosure: As the article suggests, though I'm currently long I'll likely sell down my position in the coming months.