ModernGraham Valuation Of Harley Davidson Inc.

| About: Harley-Davidson, Inc. (HOG)
This article is now exclusive for PRO subscribers.


HOG is suitable for Enterprising Investors, but not Defensive Investors following the ModernGraham approach.

According to the ModernGraham valuation model, the company is undervalued at the present time.

The market is implying 6.33% annual earnings growth over the next 7-10 years, which is significantly less than the growth the company has seen in recent years.

Harley Davidson Inc. (NYSE:HOG) presents an intriguing investment possibility for value investors, as the company has maintained fairly strong earnings growth over the last few years that may not be properly priced into the market price. Benjamin Graham, the father of value investing, taught that looking at the price cannot be the sole factor in investment decisions, as the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits. Here is a look at how Harley Davidson Inc. fares in the ModernGraham valuation model.

The model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method, one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries.

HOG Chart

HOG data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - FAIL
  6. Moderate PEmg (price over normalized earnings) ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $64.79
MG Value $117.94
MG Opinion Undervalued
Value Based on 3% Growth $44.42
Value Based on 0% Growth $26.04
Market Implied Growth Rate 6.33%
Net Current Asset Value (NCAV) -$11.71
PEmg 21.15
Current Ratio 1.55
PB Ratio 4.28

Balance Sheet - September 2014

Current Assets $4,202,000,000
Current Liabilities $2,707,000,000
Total Debt $3,573,000,000
Total Assets $10,026,000,000
Intangible Assets $29,000,000
Total Liabilities $6,741,000,000
Outstanding Shares 216,900,000

Earnings Per Share

2014 (estimate) $3.79
2013 $3.28
2012 $2.72
2011 $2.55
2010 $0.62
2009 -$0.24
2008 $2.79
2007 $3.74
2006 $3.93
2005 $3.41
2004 $3.00

Earnings Per Share - ModernGraham

2014 (estimate) $3.06
2013 $2.40
2012 $1.86
2011 $1.59
2010 $1.46
2009 $2.16

Dividend History

HOG Dividend Chart

HOG Dividend data by YCharts


Harley Davidson fares quite well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth or stability over the last ten years, and the high PEmg and PB ratios, while the Enterprising Investor is only initially concerned by the level of debt relative to the net current assets. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.

When it comes to that valuation, it is critical to consider the company's earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $1.46 in 2010 to an estimated $3.06 for 2014. This is a fairly strong level of demonstrated growth which is well above the market's implied estimate for 6.33% earnings growth over the next 7-10 years. Here, the historical growth in EPSmg over the last five years is around 21.93% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but it may be unrealistic that the company would see such a significant slowdown in growth over the long term. Therefore, the model returns an estimate of intrinsic value above the current price, indicating the company is significantly undervalued at the present time.

Be sure to check out previous ModernGraham valuations of Harley Davidson Inc. for greater perspective!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.