Harley-Davidson, Inc.

Transcription

1 Grade Earnings Last Earnings Release 10/17/2017 Last Qtr. Actual vs. Est. $0.40 / $0.41 Next Release 10/24/2017 $0.40 Year Ending 12/31/2016 $3.87 Quick Facts Dividend Yield 2.89% 52 Wk High $ Wk Low $44.78 Short Interest 17% of float $ /14/2017 Rated 'HOLD' since Feb 9th, 2017, when it was downgraded from 'BUY' Year Ending 12/31/2017 $4.23 Market Cap $8.4B Overview Narrowly Passing Grades Put Stock Near SELL Rating MarketGrader currently has a HOLD rating on Harley- Davidson, Inc. (HOG), based on a final overall grade of scored by the company's fundamental analysis. scores at the 70th percentile among all 5816 North American equities currently followed by MarketGrader. Our present rating dates to February 9, 2017, when it was downgraded from a BUY. Relative to the Motor Vehicles sub-industry, which is comprised of 12 companies, 's grade of ranks sixth. The industry grade leader is Toyota Motor Corp. Sponsored ADR (TM) with an overall grade of The stock has performed poorly in the last six months in relative terms, down 6.74% compared with the Motor Vehicles sub-industry, up 17.21% and the S&P 500 Index, up 9.0%. Please go to pages two and three of this report for a complete breakdown of HOG's fundamental analysis. Price, Rating and Sentiment History - 2 Years 1

2 Growth D Dismal Growth Indicators denote Very Difficult Operating Conditions and an Uncertain Outlook Harley-Davidson,'s sales growth continued its ongoing long term decline Market Growth LT F last quarter. Total revenue for the period was $1.15 billion, 9.70% below the $1.27 billion booked by the company a year ago. Its 12-month trailing Market Growth ST F revenue, which also included last quarter's results, was $5.53 billion, EPS Growth F 11.10% lower than the 12 months ended three years ago. As sales continue to slide the company will need to cut costs in order to protect its Growth Potential F margins and its cash reserves. However, unless business conditions improve soon, more drastic restructuring measures may be required. In its Earnings Momentum B latest report the company also said profit fell from the comparable quarter a year ago, extending its long term profit decline. We measure long term Earnings Surprise C profit growth by comparing full year (12-month trailing) net income to the equivalent period three years earlier. Harley-Davidson, posted a Third quarter profit decrease of 40.20% to $68.21 million from $ million (excluding extraordinary items) a year earlier; it also reported a 33.70% drop in profit in the 12 months ended last quarter to $ million from the $ million it made in the same period three years before. The company's margins have been shrinking steadily during the last three quarters, albeit at a slower rate during the latest period. Its EBITDA, operating and net margins fell on average by 18.45% in the latest quarter versus the year ago period. The company's stock gained 3.11% after its October 17, 2017 earnings announcement despite missing the analysts' consensus estimate by 2.44%. This latest report is further evidence of its consistent inability to meet earnings estimates, which is usually a detrimental factor to the performance of the stock; it has missed analysts' estimates by 0.73%, on average, over the last six quarters. Revenue Qtrly. 09/30/2017 $1.2B Revenue Qtrly. Year Ago $1.3B Revenue 1 Yr. Chg. (9.7%) Revenue 12 Mo. Tr. Latest $5.5B Revenue 12 Mo. Tr. 3Y Ago $6.2B Revenue 12 Mo. Tr. 3Y Chg. (11.1%) Net Income Qtrly. 09/30/2017 $68M Net Income Qtrly. Year Ago $114M Net Income 1 Yr. Chg. (40.2%) Net Income 12 Mo. Tr. Latest $561M Net Income 12 Mo. Tr. 3Y Ago $846M Net Income 12 Mo. Tr. 3Y Chg. (33.7%) Value B Assuming the Company's Fundamentals Don't Deteriorate in Coming Quarters, the Stock's Valuation is Acceptable at this Level Shares of Harley-Davidson, trade currently at times the company's Capital Structure F 12-month' earnings per share, which represents a small 5.82% premium to the MarketGrader-calculated optimum P/E ratio of This ratio is P/E Analysis C based on the company's last five years of quarterly earnings, grouped in Price/Book Ratio A 12-month rolling periods to determine their growth rate. Harley- Davidson,'s earnings per share, based on this measure, have grown at Price/Cash Flow Ratio A an annualized 2.27% rate during this time. This rate of growth could decelerate soon given the company's recent margin contraction, despite Price/Sales Ratio B such good Profitability grades. This could in turn put pressure on the stock price. The stock is also valued at times the company's Market Value A- forward earnings estimates for the next four quarters, which means that it trades below its trailing P/E and the market's forward P/E of (based on earnings estimates for the S&P 500). Therefore investors may see the current valuation as fully reflecting the company's EPS growth prospects and its current fundamentals. Investors are currently valuing Harley-Davidson,'s shares at 9.99 times their tangible book value (which excludes intangible assets such as goodwill), a relatively healthy valuation. When the company's intangible assets, which represent a modest 8.20% of stockholders' equity, are added back to the rest of its assets, the stock's price to book ratio drops to The company's low price to cash flow ratio of 7.14, based on the $7.00 it generated in cash flow per share over the last four quarters, would be an attractive valuation if its overall fundamentals weren't so poor. Therefore such a low ratio could mean investors aren't willing to pay much for the company's earnings prospects. Its shares also trade at 1.52 times its trailing 12-month sales, a small 6.14% discount to the Motor Vehicles industry average price to sales ratio of Our final value indicator looks at the relationship between the company's current market capitalization and its operating profits after deducting taxes. According to this indicator Harley-Davidson,'s $8.42 billion valuation is reasonable at times its most recent quarterly net income plus depreciation. P/E Ratio 12 Mo. Tr. 09/30/ Optimum P/E Ratio Forward P/E Ratio S&P 500 Forward P/E Ratio Price to (Tangible) Book Ratio 5.01 Price-to-Cash Flow Ratio 7.14 Price/Sales Ratio

3 Profitability A- Company's Operations Are Very Profitable and Indicate a Solid Business Environment Harley-Davidson, is very profitable and this is reflected across the board Asset Utilization B- in this category's indicators, with operating margins that exceed its peer group average and a very solid return on shareholder equity, all based on Capital Utilization A+ 12-month trailing data. The $ million in net profit it earned during Operating Margins B the same period accounted for 10.14% of total revenue, a healthy net profit margin. Operating income during that same period accounted for Relative Margins A % of sales, % higher than the average operating margin for the Motor Vehicles industry, which was 5.67%. Based on how much it has Return on Equity A earned in the last four quarters, the return on Harley-Davidson,'s common equity has been a remarkable 30.19% during this time, even though this Quality of Revenues A is below the 34.49% return on equity achieved in the year-earlier period. This metric plays an important role in how our system measures a company's management efficiency. Considering this recent deceleration in the company's business it will be important to monitor its considerable amount of leverage, with total debt 3.76 times the size of total equity. However, its results are still pretty strong and justify the current capital structure in which long term debt makes up 71.28% of Harley-Davidson,'s total capital. Harley-Davidson,'s core earnings have shown a significant slowdown in the company's business based on twelve month trailing EBITDA of $ million. This represents a 25.88% decline from the same period ended a year earlier in which the company's core operations generated $1.22 billion. EBITDA is used as a measure of earnings power because it includes non-operating charges like interest expenses, income taxes and depreciation and amortization, which aren't even cash expenses. All of these are included in several areas of our analysis that look at EPS and net income. Cash Flow B+ Company's Management of its Cash Flow Appears Very Sound but Could Improve in a Few Areas Harley-Davidson,' cash flow fell considerably during the latest quarter to Cash Flow Growth F $ million, a 31.71% decline from the $ million reported after the same quarter last year. What's more important and worth highlighting EBIDTA Margin B- is the fact that up to the most recent quarter the company's twelve month Debt/Cash Flow Ratio A- trailing cash flow was growing very healthily, up 18.08% compared to the same period ended a year before. This marks a sharp slowdown in the Interest Cov. Capacity A+ company's business environment and is likely to put considerable pressure on its margins. The company's net debt, which MarketGrader Economic Value B defines as total debt minus cash on hand, was $6.24 billion last quarter, times its EBITDA of $ million. Not only did this ratio increase Retention Rate A+ from in the equivalent quarter a year ago, but it is now fairly large, suggesting the company's flexibility in paying down its debt or raising new capital to pursue new opportunities is limited. Of further concern is not only the fact that as a percentage of total capital Harley-Davidson,'s total debt has climbed to 78.97%, 1.69% higher than a year earlier when it represented 77.66% of total capital but also that its cash on hand has fallen by 14.54% during the same period. It therefore seems clear the company is using leverage to curb a deterioration in its core business, at least temporarily, perhaps at the expense of future profitable growth. MarketGrader's Economic Value indicator looks at the company's returns on invested capital after measuring the cost of obtaining it and of keeping investors' capital tied up in its business. In this case, Harley-Davidson, had $6.46 billion in invested capital as of its most recently reported quarter, on which it generated a 10.36% return based on 12-month trailing operating income. Its total after tax cost of capital was 2.05% during the same period, most of it associated with its weighted cost of equity, which was 1.84% vs. its 0.21% weighted cost of debt. Deducting these costs from the total return on investment translates into Harley-Davidson,'s economic value added (EVA) of 8.31%. While not outstanding, this represents and acceptable true economic profit after accounting for both operating and capital costs. The company increased its quarterly common dividend on September 30, 2017 by 4.29%, to $0.365 cents a share from $0.350 cents. It has paid a dividend for at least 24 years and, based on this latest payout, the stock is currently yielding 2.89%. Harley-Davidson,, which recently increased its payout ratio, has spent $ million in common dividend payments during the last 12 months. This represents 21.08% of total cash flow and 44.96% of after-tax earnings, a modest increase from the 41.71% of earnings it paid out in the year ended a quarter earlier. The increasing trend of an already elevated payout is worth monitoring for signs fo liquidity problems even though the company's fundamentals are generally healthy. Cash Flow Qtrly. 09/30/2017 $322M Cash Flow Qtrly Year Ago $472M Cash Flow 1 Yr. Chg. (31.71%) Cash Flow 12 Mo. Tr. Latest $1.2B Cash Flow 12 Mo. Tr. 3Y Ago $1.1B Cash Flow 12 Mo. Tr. 3Y Chg. 6.86% Free Cash Flow Last Qtr. $278M Economic Value Total Invested Capital $8.8B Return on Inv. Capital 10.36% Weighted Cost of Equity 1.84% Weighted Cost of Debt 0.21% Total Cost of Capital 2.05% Economic Value Added 8.31% 3

4 Profile manufactures and sells heavyweight motorcycles as well as a line of motorcycle parts, accessories, general merchandise and related services. It manufactures five families of motorcycles: Touring, Dyna, Softail, Sportster, and V-Rod. It also provides wholesale and retail financing and insurance programs primarily to Harley-Davidson dealers and customers. The company operates through two principal business segments: Motorcycles & Related Products and Financial Services. The Motorcycles & Related Products segment designs, manufactures and sells at wholesale heavyweight cruiser and touring motorcycles as well as a line of motorcycle parts, accessories, general merchandise and related services. It includes the Harley-Davidson and Buell product lines. The Financial Services segment is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans, primarily for the purchase of Harley- Davidson motorcycles. It conducts business principally in the United States and Canada. Harley- Davidson was founded by William Sylvester Harley, Arthur Davidson, Walter C. Davidson and William A. Davidson in 1903 and is headquartered in Milwaukee, WI. Key Facts: 3700 West Juneau Avenue Milwaukee,WI Phone: Biggest Company in Sub-Industry Toyota Motor Corp. Sponso Grade 63.4 Market Cap:$ billion Smallest Company in Sub-Industry Unisync Corp. Class B Grade 32.9 Market Cap:$42.68 million MarketGrader Dilution Analysis Impact of Change in Shares on EPS - Q Dilution Summary Income Statement Last Qtr (09/2017) 12 Mo. Trailing Revenue $1.2B $5.5B *EPS Latest $0.40 *EPS Year Ago $0.64 EPS Change 1 Yr. (37%) C. Shares - Latest(M) 171 C. Shares - Yr Ago(M) 179 C. Shares - 1Yr Chg. (5%) EPS if Yr. Ago Shares $0.38 EPS Chg. if Yr. Ago (40%) EPS Loss from Dilution $0.02 *Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company. Op. Income $104M $670M Net Income $68M $561M *EPS $ *Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company. Balance Sheet Total Assets Total Debt Latest $10.1B $7.0B Stockholders Eq. $1.9B All numbers in millions except EPS Total Assets $10.1B Intangible Assets $152M Long Term Debt $4.6B Total Debt $7.0B Book Value $1.9B Enterprise Value $6.2B '12 '13 '14 '15 '16 '17 Qtr Qtr Qtr Qtr Ratios Price/Earnings (12 mo. trailing) Price/Tangible Book 5.01 Price/Cash Flow 7.14 Price/Sales 1.52 Debt/Cash Flow Return on Equity 30.19% Gross Margin (12 mo. trailing) 33.26% Operating Margin (12 mo. trailing) 12.11% Net Profit Margin (12 mo. trailing) 10.14% 4

5 Top Down Analysis Consumer Discretionary Stocks in Sector: 667 Buys: 117 (17.54%) Holds: 137 (20.54%) Sells: 413 (61.92%) No. of stocks at: 52-Wk. High: Wk. Low: 18 Above 50 & 200-day MA: 312 Below 50 & 200-day MA: 180 Motor Vehicles Stocks in Sub-Industry: 12 Buys: 2 (16.67%) Holds: 4 (33.33%) Sells: 6 (50.00%) No. of stocks at: 52-Wk. High: 0 52-Wk. Low: 0 Above 50 & 200-day MA: 7 Below 50 & 200-day MA: 1 # Ticker Grade Sentiment Name Price Next EPS 1 EVC P Entravision Communications Corporation $ /09/ THO P Thor Industries, Inc. $ /04/ NTRI N Nutrisystem, Inc. $ /08/ MAR P Marriott International, Inc. Class A $ /14/ ITRN N Ituran Location & Control Ltd. $ /11/ HD P Home Depot, Inc. $ /21/ TSG N Stars Group Inc. $ /13/ ROST N Ross Stores, Inc. $ /01/ SWK P Stanley Black & Decker, Inc. $ /26/ NVR P NVR, Inc. $3, /23/ HOG N $ /24/2017 # Ticker Grade Sentiment Name Price Next EPS 1 TM P Toyota Motor Corp. Sponsored ADR $ /08/ RACE P Ferrari NV $ /03/ FCAU P Fiat Chrysler Automobiles N.V. $ /25/ GM P General Motors Company $ /25/ HMC P Honda Motor Co., Ltd. Sponsored ADR $ /02/ HOG N $ /24/ F P Ford Motor Company $ /25/ TTM N Tata Motors Limited Sponsored ADR $ /10/ REVG N REV Group, Inc. $ /27/ UNI.CA N Unisync Corp. Class B $3.20 N/A 1. Price Trend. B- 2. Price Momentum. F 3. Earnings Guidance. B+ 4. Short Interest. C 5.3 Copyright 2010 MarketGrader.com Corp. All rights reserved. Any unauthorized use or disclosure is prohibited. Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regards to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. MarketGrader does not make markets in any of the securities mentioned in this report. MarketGrader does not have any investment banking relationships. MarketGrader and its employees may have long/short positions or holdings in the securities or other related investments of companies mentioned herein. Officers or Directors of MarketGrader.com Corp. are not employees of covered companies. MarketGrader or any of its employees do not own shares equal to one percent or more of the company in this report. 5