Harley Davidson Stock Report - fisher.osu.edu Summer Harley... · Harley-Davidson is also very...

Valuation RatiosPrice/Earnings (TTM) 17.35Price/Sales (TTM) 2.9Price/Book (MRQ) 5.72Price/Cash Flow (TTM) 14.01

Profitability RatiosGross Margin (TTM) 35.3Operating Margin (TTM) 25.48Net Profit Margin (TTM) 16.69

Financial StrengthQuick Ratio (MRQ) 3.02Current Ratio (MRQ) 3.53LT Debt/Equity (MRQ) 0.3Total Debt/Equity (MRQ) 0.31

Per Share DataEarnings (TTM) 3.1Sales (TTM) 18.54Book Value (MRQ) 9.39Cash Flow (TTM) 3.83Cash (MRQ) 5.48

Management EffectivenessReturn on Equity (TTM) 29.77Return on Assets (TTM) 18.26Return on Investment (TTM) 22.25

Dividend InformationDividend Yield (%) 0.75Dividend per Share (MRQ) 0.16Payout Ratio (MRQ) 18.91

Employees 9580(In Millions)

Market Cap 15,294.96Shares Outstanding 274.4

3700 West Juneau AvenueMilwaukeeWI 53208

United States

http://www.harley-davidson.com

Stock Report August 12, 2005 Current Price: $52.11 12-Month Price Target: $60.00 NYSE Listed: HDI Recommendation: BUY 12-Month Range: $45.14 - $63.23

Analyst Information

S&P 500 Weight: Approximately 0.13% Sector: Consumer Discretionary Name: Joshua P. Siler Sub-Industry: Recreational Vehicles Email: [email protected] Peer Group: Motorcycles Phone: (614) 921-8434 Course: MBA 824

Highlights A somewhat negative report issued by the company in April, led to the decrease in share price by 17% in one day of trading. This price adjustment was overdone and has created a unique buying opportunity for investors. The company has introduced six new models for the 2006 model year. In addition, the company has released a limited addition 35th anniversary Super-Glide model. The new motorcycles and special anniversary release should create excitement for the brand and draw new customers into showrooms. Harley-Davidson’s domestic market share is 50% and rising. The company is starting to target a much overlooked market in this industry: women. Look for new models and design features catered toward this growing market segment. The stock price valuations indicate a good value, coupled with year over year high ROE and growth rates in addition to a clean balance sheet and strong cash flows. Money should be drawn back towards the stock, lifting the stock price back to pre-April levels.

Harley Davidson, Inc.

High Return

Risk Low

(TTM) – Trailing Twelve Months (MRQ) – Most Recent Quarter -All Figures from Reuters Fundamentals

Current Price: $52.11 12-Month Price Target: $60.00 August 12, 2005 Recommendation: BUY 12-Month Range: $45.14 - $63.23 NYSE Listed: HDI

Joshua P. Siler, Fisher College of Business of 35 Harley-Davidson, Inc. August 12, 2005


Table of Contents

Page Business Overview 3 Economic Overview 4 Federal Funds Rate 4 Oil 5 Consumer Confidence 5 Unemployment 6 Disposable Income 6 Summary 7 Economic Factor Regression 7 Revenues 7 Stock Price 8 Sector Overview 9 Industry Analysis 12 Company Analysis 12 New Products 13 Demographics 13 Company Management 14 Risks 14 Regulatory and Environmental 14 Recalls and Lawsuits 15 Competition 15 Brand Image Loss 15 Financials 16 Income Statement 16 Balance Sheet 17 Cash Flows 18 Return on Equity 21 Valuation 22 Technical Analysis 26 Recommendation 26 Acknowledgements 27 References 28 Exhibits 29




Business Overview1 Harley-Davidson engages in the design, manufacturing, distribution and sales of premium motorcycles for the heavyweight motorcycle (+651 cc) market. In addition to the company’s well-known Harley-Davidson brand, it also offers a line of performance driven motorcycles under the Buell brand name. Overall, approximately 80% of the company’s 2004 net revenues were derived from worldwide motorcycle sales. The company’s products rely on traditional styling, quality and ownership pride. For 2005, the company had 32 models of Harley-Davidson touring and custom motorcycles with a retail price from $6,495 to $20,405. The models fall under one of five families; Sportster, Dyna Glide, Softtail, Touring and VRSC. In addition to this model line, the company also offers limited edition custom motorcycles. These motorcycles are produced in limited quantities and have unique features, colors and accessories to create a one of a kind motorcycle which is highly desired in the market. The retail prices for these special edition motorcycles range from $24,495 to $29,995. The Buell brand offers an overall performance package at relatively lower prices than the Harley-Davidson brand. Buell currently offers 6 models in two families; XB and Blast. The XB family focuses on handling and performance and has a retail price range of $8,695 to $10,495. The Blast is smaller, less powerful and less expensive with a retail price of $4,595. Harley-Davidson Financing Services (HDFS) operates under the trade name of Harley-Davidson Credit and provides financial services to dealerships and retail financing to customers. Under the trade name Harley-Davidson Insurance, the company provides a wide variety of Insurance policies and extended warranties to customers. These services often offer competitive rates for customers rivaling those that could be found at a bank, credit union or outside insurance company. In addition to motorcycles, Harley-Davidson also sells parts and accessories for existing motorcycle repair and customization. Through its Genuine Motor Parts and Genuine Motor Accessories divisions, the company received approximately 15.4% of its 2004 worldwide net revenue. Harley-Davidson also offers merchandise which includes apparel, collectible toys, memorabilia and other items. This arm of the company provided 4.5% of the 2004 net revenues. A small amount of revenue is generated from the licensing of the Harley-Davidson logo and brand on various items such as t-shirts, jewelry, leather products, safety glasses and even a restaurant located in Las Vegas. The revenue from this business is small, approximately $41 million in 2004, but growing as the company expands its brand name recognition internationally.




The firm has a number of advantages over its competition. First and foremost is the highly storied and immediately recognizable brand name and image. The company has been in existence for over 100 years and has a legacy built into its brand that will be difficult for any competitor to overcome. The business has a very loyal customer base and typically 90% of Harley-Davidson motorcycles owners have indicated intent to purchase another Harley motorcycle. Customers seem to have an almost cult-like following and the company sponsors large charity events and biker rallies throughout the country. Harley-Davidson created and trademarked the Harley Owners Group (H.O.G.) as a platform for Harley riders to interact and share a passion for the brand2. With over 900,000 members, H.O.G. is one of the most recognizable customer loyalty programs in the industry. Harley-Davidson is also very careful with its production output to keep the motorcycle demand ahead of supply. Currently, the waitlist for a new motorcycle is approximately one year. This allows the prices and margins to remain high along with the excitement and anticipation that comes along with Harley ownership. Currently, Harley-Davidson has a 50% market share. The ability to offer a one-stop package for low interest retail financial and insurance services through its HDFS arm is a significant competitive advantage for Harley-Davidson. Finally, the company has a number of active patents (477) which are protected by the US Patent Office. Some of these patents give the manufacturer certain design features and characteristics that are favorable to consumers or which offset manufacturing costs. Either way, the patents provide Harley-Davidson with a sustainable competitive advantage of patented design features for the duration of the patents, typically 20 years. Economic Overview Federal Funds Rate The Federal Reserve Board has been steadily raising the Federal Funds rate by 0.25% for the past 10 sessions since mid 2004. The Feds objective is to dampen inflation worries caused by healthy increases in the GDP. Although high inflation may be a necessary by-product of healthy economic growth, the end result of interest rate increases is a slowing economy. In this economic environment which is highlighted by a jobless recovery and record high oil process, curbing the growth by stifling the ease of financing could cut off the fertilizer necessary to sustain this half-hearted recovery.

Figure 1 – Federal Funds Rate




For Harley-Davidson, however, a higher Funds Rate may not have as much of an effect as seen at other companies because Harley has at its disposal an in-house financing arm through HDFS. Financing in this manner by-passes the market rates and allows Harley to offer low interest financing to prospective customers. Oil

Oil affects almost every industry through higher energy costs to produce goods and higher fuel costs to deliver goods to customers. The record high cost of oil will certainly provide some resistance to the growth seen lately in the economy. The evidence that this economy can handle $70 per barrel oil is debatable and only time will tell if the recent oil spikes predicate a new recession. Harley-Davidson might feel the pinch as suppliers of necessary key raw materials and parts require price increases to offset the cost of higher energy bills and transportation surcharges. Harley-

Davidson’s factories themselves will have to assume a higher manufacturing cost at its facilities. Ultimately these costs are rolled down to the consumer whom may resist such price increases. Consumer Confidence3 The Consumer Conference Board issues a monthly Consumer Confidence Index based on a survey of 5,000 households. The outlook for the labor market was mixed. People anticipating additional jobs to become available in the upcoming months edged up from 15.4 percent to 15.8%, while those expecting fewer jobs rose to 16.8 percent from a June figure of 16.4 percent. Those surveyed who are anticipating their incomes increasing in the months ahead fell to 18.6 percent from 19.9 percent recorded in June. The overall assessment of market conditions was mixed in July. Those claiming business conditions are “bad” increased to 16.9 percent from 15.3 percent. However, those claiming conditions are “good” improved to 28.7 percent from 26.7 percent. The employment picture was also mixed. Consumers saying jobs are “hard to get” increased to 23.8 percent from 22.5 percent, but those claiming jobs are “plentiful” held steady at 22.5 percent.

Figure 2 – Spot Oil Price

Figure 3 – Consumer Confidence




StockVal®1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

UNEMPLOYMENT RATE,SA %3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

5.8

6.0

6.2

6.4

HI 6.30 LO 3.80 ME 5.20 CU 5.00

08-31-199507-31-2005

Consumer Confidence data is important because it is a reliable gauge to the likelihood of increases or decreases in household spending. Companies in the Consumer Discretionary Sector are very much affected by the ebb and flow of consumer psychology. When consumers are more confident in their own personal lives and have comfort with employment and income situations, they are more likely to purchase more luxury items and take more vacations. The current numbers suggest that consumer confidence is healthy but underlying uneasiness about the future could prevent a full fledged economic boom. Harley-Davidson customers satisfied with their jobs and career prospects may “celebrate” their personal situation with the purchase of a new motorcycle. Unemployment The latest US Department of Labor data shows the current unemployment rate is 5.0%. The overall trend is a decrease in unemployment steadily from the mid-2003 high of 6.3% nationwide. Although this number is a national average with some pockets of the country having higher unemployment rates, this can certainly be seen as a positive indication of a strengthening economy. This should provide growth for industries which rely on household spending to maintain growth. Currently, the unemployment rate is in a period of steady decline as jobs are created. This job creation process has been slow due to outsourcing and low consumer demand for domestic goods, so we might expect unemployment to remain between 4% and 5% for quite some time. Disposable Income

Disposable Income, as measured by the US Department of Commerce, has shown a steady increase in household disposable income over the last five years. As the name implies, this represents money available to households after all necessary taxes have been paid out. Of course, this figure does not include non discretionary expenses such as housing, food, transportation, heating and child care. But nonetheless, the figure

has been rising which indicates a rise in income amongst wage earning individuals.

Figure 4 – Unemployment Data

Figure 5 – Disposable Income




Summary Outside of rising interest rates and oil prices, the economy is growing at a healthy rate and this trend should continue into the near term future provided oil prices stay below $70 per barrel and the Fed soon puts a halt on the Fund rate increases. Job growth remains tepid but productivity gains are strong. In addition, the weak dollar should boost exports and thus stimulate growth with the domestic producers of goods. Economic Factor Regression Revenues An analysis of data was conducted using historical economic data found in the StockVal database. The prime reason to undertake this study was to determine which economic factors have the greatest impact on Harley-Davidson’s revenues and ultimately stock price. Based on the regression performed using Minitab, a statistical software package, the key factors affecting revenues for Harley-Davidson are; disposable income, GDP and population income. An interaction was discovered between population and income and thus the product of the two fields (Population * Income) was used to create the new independent variable; Population Income. There were several elements built into the model each with varying degrees of causality. Good Predictors Weak Predictors Overlapping Predictors Disposable Income Federal Funds Rate Personal Income GDP Unemployment Personal Consumption Population Income Population Personal Savings Consumer Price Index Overall the equation that best predicts the revenue for Harley-Davidson based on economic data is; Revenue = 10623.31 - 9.165 * Disposable Income – 0.628 * GDP + 0.032 * Population Income. This model has superb statistical significance as evidenced from the R-squared and F-Factor results. The model is somewhat counterintuitive in that as both disposable income and GDP rise, the revenue for the company diminishes. It is unknown at this point why this condition exists. A possible hypothesis is that as the nation becomes wealthier as a whole, household capital is placed in wealth building areas such as housing or retirement plans. Another possibility could also be that the overall wealth of the nation in the form of overall disposable income (as opposed to per capita) and GDP outstrip the company’s revenue growth. Further studies must be undertaken to fully understand the reasons behind the numbers.




Actual vs. Predicted Stock PriceHarley-Davidson

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6/15/1994 10/28/1995 3/11/1997 7/24/1998 12/6/1999 4/19/2001 9/1/2002 1/14/2004 5/28/2005 10/10/2006

Actual PricePredicted Price

Figure 6 – Revenue Regression Analysis

Figure 7 – Stock Price Regression Graph

Figure 8 – Stock Price Regression Analysis

Regression StatisticsMultiple R 0.94029191R Square 0.88414888Adjusted R Square 0.87805145Standard Error 6.36833414Observations 41

ANOVAdf SS MS F

Regression 2 11761.43856 5880.719 145.0036Residual 38 1541.115827 40.55568Total 40 13302.55439

Coefficients Standard Error t Stat P-valueIntercept 19.0543371 7.531880641 2.529825 0.015679Revenue 0.01415249 0.000844344 16.76151 3.81E-19Unemployment -5.4050898 1.583939058 -3.412435 0.001542

Regression StatisticsMultiple R 0.998258763R Square 0.996520558Adjusted R Square 0.996238441Standard Error 78.74101894Observations 41

ANOVAdf SS MS F

Regression 3 65702279.81 21900760 3532.296Residual 37 229405.4783 6200.148Total 40 65931685.28

Coefficients Standard Error t Stat P-valueIntercept 10623.3089 883.2534321 12.02748 2.38E-14Disposable Income -9.165108224 0.517933296 -17.69554 1.21E-19GDP -0.628469914 0.107632931 -5.839011 1.04E-06Population Income 0.031575556 0.001389716 22.72088 2.49E-23 Stock Price A similar analysis was conducted to discover if a correlation could be found amongst the previously mentioned economic factors and the stock price. Based on the regression analysis, the model that best describes the stock price is; Price = 19.054 + 0.01 * Revenue – 0.541 * Unemployment

Although the model is statistically not as good as the previous one (though still very statistically significant) the conclusions based on this model make sense logically. In general, the stock price is strongly correlated to revenues and negatively correlated to the unemployment rate. The same conclusions could probably be drawn about any number of stocks in the market.




Specialty Retail

Hotels, Restaurants and Leisure

Multiline Retail

Household Durables

Autos

Internet and Catalog Retail

Textiles, Apparel and Luxury Items

Leisure Equipment and Products Auto Components

Distributors

Media

Sector Overview The consumer discretionary sector is a large and very diverse component of the S&P 500 and comprises 11.5% of the overall index. The following table shows the breakdown of the sector into its various sub-sectors. As shown in this table and chart, the sector is indeed highly diverse and covers a myriad of industries from automobile manufacturers to casinos.

Automobiles and Components

• Auto Parts and Equipment • Tires and Rubber • Motorcycle Manufacturers • Automobile Manufacturers

Consumer Durables and Apparel • Household Durables • Leisure Equipment and Products • Textiles and Apparel

Hotels, Restaurants and Leisure • Casinos and Gambling • Hotels • Leisure Facilities • Restaurants

Media • Advertising • Broadcast and Cable Television • Movies and Entertainment • Publishing and Printing

Retailing • Distributors • Internet and Catalog Retailers • Multiple Retail • Specialty Retailers

Figure 9 – Consumer Discretionary Sector Components




StockVal®S&P CONSUMER DIS. SECTOR COMPOSITE A Price 33.11995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

FEDERAL FUNDS RATE %0.5

1.0

2.0

3.5HI 6.86 LO 0.96 ME 4.86 CU 3.51

08-11-199508-12-2005

CONSUMER CONFIDENCE INDEX60

75

95

115HI 144.70 LO 61.42 ME 109.68 CU 103.20 GR 0.1%

08-31-199507-31-2005

UNEMPLOYMENT RATE,SA %3

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6HI 6.30 LO 3.80 ME 5.20 CU 5.00

08-31-199507-31-2005

NET PROFIT MARGIN ADJUSTED %3

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5HI 5.2 LO 3.4 ME 4.4 CU 4.8

09-30-199506-30-2005

As the name implies, this sector is primarily comprised of companies that provide goods and services to households with extra disposable income, otherwise known as discretionary income. Household discretionary income is correlated strongly to a number of economic factors and thus the sector tends to be highly cyclical in nature. When the economy is good and unemployment is low, businesses in this sector enjoy higher revenues, margins and growth. Conversely, when the economy is showing weakness and the job market is tight, people are reluctant to purchase an automobile, take a trip or dine at a restaurant.

As shown in Figure 10 above, the net profit margin for businesses in this sector are highly correlated to the Federal Funds Rate, Consumer Confidence Index and the Unemployment Rate. To elaborate further, the Federal Funds Rate can be seen as a lagging indicator of how this sector is performing. This naturally makes sense, considering the Reserve Board makes adjustments based on inflation and GDP which are resultant figures and thus the Fed Rate is changed in reaction to changes in the spending habits of consumers. This can be especially seen at the

Figure 10 – Factors Affecting Consumer Discretionary Sector




inflection points in the data. An inflection in the profit margin curve is usually accompanied by a lengthy flat period for the federal funds rate. The Consumer Confidence Index could be viewed as a leading indicator of the performance of this sector and the data shows a strong correlation between these two figures. As seen in Figure 10, the Consumer Confidence Index is rising in step with increases in the profit margins. As the confidence index level approaches its 10 year mean, we should look for a slow down in the economy and thus diminishing profit margins for businesses in this sector. To be precise, the Unemployment Rate is inversely correlated to the profit margins of businesses in this sector. Again, as seen in figure 10, the profit margins rise when unemployment is low and increase as unemployment decreases. As mentioned earlier, the economic forecast for job creation is weakened by outsourcing of jobs to China and India and may create an environment where the unemployment rate is held at around 5% for a lengthy time frame.

StockVal®S&P CONSUMER DIS. SECTOR COMPOSITE A Price 33.11995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.8

1.0

1.2HI 1.37 LO 0.80 ME 1.06 CU 1.22

08-11-199508-12-2005

PRICE / EBITDA RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.6

0.8

1.0

1.2 HI 1.36 LO 0.66 ME 0.89 CU 1.10

08-11-199508-12-2005

PRICE / SALES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.4

0.5

0.6

0.7 HI 0.70 LO 0.46 ME 0.58 CU 0.69

08-11-199508-12-2005

PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.6

0.7

0.8

0.9 HI 0.94 LO 0.62 ME 0.76 CU 0.93

08-11-199508-12-2005

Figure 11 – Sector Valuations




US Motorcycle Market ShareHeavyweight (651+)

Harley

Honda

Suzuki

Yamaha

Kawasaki

Other

Market Share By Year

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Harley Honda Suzuki Yamaha Kawasaki Other

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From a valuation standpoint, the stocks which comprise the Consumer Discretionary Sector of the S&P 500 are overpriced relative to the broader market. This of course, does not mean that there cannot be found some good values within this widely diverse sector as certainly Harley-Davidson fits the criteria. Industry Analysis Harley-Davidson is in the Recreational Vehicle sub-sector of the Consumer Discretionary Sector. This sub-sector represents a very mature industry with cyclical type performance. However, this sub-sector should do well in the next few years as the trailing edge of the baby-boomer generation enters pre-retirement age and, for the most part, has well established careers and stable incomes. This industry typically does well in a burgeoning economy such as this. Company Analysis Amongst motorcycle manufacturers with domestic sales, Harley-Davidson is by far the market leader. With a market share of over 50%, Harley owns more of the US market than all other manufacturers combined. This figure is stunning considering the competition is fierce and Harley-Davidson motorcycles are often sold at a 50% premium compared to other motorcycle makes on the market. These figures are not localized to one year, as can be seen from Figure 13, Harley-Davidson’s market share has been steadily increasing year over year while its competitor’s market share has been steady or declining.

This market share can be attributed mostly to Harley-Davidson’s highly recognizable brand image, loyal customers and the quality of its products. Harley-Davidson’s differentiation strategy has allowed it to increase its buyer’s willingness to pay for its product line. The company’s loyalty

Figure 12 – US Motorcycle Market Share 2004 Figure 13 – US Motorcycle Market Share by Year




Population Ages 35 to 54

72000

74000

76000

78000

80000

82000

84000

86000

88000

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

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s)

Average Income 35 to 54 Years

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me

programs, such as H.O.G,. have further strengthened its toe-hold on the market. The combination of these forces will provide considerable barriers for the competition to overcome. Overseas, particularly in Europe and Japan, the company has a small but growing percentage of the market share. Currently, the number of units sold to these markets is a relatively small portion of the overall unit sales. New Products Entering 2006, six new Harley-Davidson and two new Buell models have been introduced by the company. The Dyna family has been retooled and will now offer, among other things, a six-speed cruise drive transmission as well as a redesigned frame to provide an improved ride. In addition, the motorcycle maker is gearing up for limited-production marketing of the Super Glide to mark its 35th anniversary. The latest model, each of which will be individually numbered, will feature plenty of chrome to go with its classic design. Also of note, two additions to the liquid-cooled VRSC family are scheduled to be introduced. At the same time, Buell Motorcycle Co. will be displaying the Ulysses XB12X adventure sports bike as well as a longer version of the Lightning XB12S. These additional models should add excitement and buzz to the brand and give new reasons for prospective customers to visit showrooms. Demographics4 In addition to the new product offerings, customer demographics should also help the company’s growth prospects for the next few years. According to company records, the average Harley purchaser is a married male in his mid 40’s with an average annual household income of about $81,000. Based on the average age provided by the company, an assumption can be made as to the

35th Anniversary Super Glide1

Figure 14 – Population and Income Growth Estimates




typical age range of Harley buyers. An age profile of 35 to 54 year olds should provide the necessary range to assimilate some expectations for future growth. According to US Government Census data, the population comprising of 35 to 54 year olds is expected to rise into 2005, but stabilize after that into 2010. As an aside, the fastest growing segment of the population from 2005 to 2010 will be 54 to 65 year olds as the baby boomer generation is entering retirement age. Despite the non-growth of the segment of the population most likely to purchase a Harley-Davidson motorcycle, the income data tells a more promising story. The incomes of those individuals aged 35 to 54, men and women, should steadily increase over the next 5 years. The reason for this is because those individuals who are 35 years old now are most likely entering their peak earning years. They have more comfortable positions within their respective companies with regards to earnings, stability and the ability to leverage their collected experiences into new job prospects. These individuals are most likely to be in management roles. In summary, the data shows that Harley-Davidson’s customer base is not growing rapidly, but also not shrinking and more importantly, the incomes of the customer base are expected to grow rapidly for the next 5 years. Harley-Davidson is expanding its current product line to accommodate a widely ignored market; women. In 1986, Harley-Davidson sold 600 motorcycles to female riders5. In 2004, the number grew to 30,000 units. This year, the company is introducing models with seats that sit lower and offer parts to tailor the ride for females. Although, the company does not have an official marketing plan for the emerging women rider market, it does have new rider courses specifically developed for women. It is hoped that women will become more accustomed to motorcycle ownership through the rider experience and training. Company Management Of the 11 key Corporate Executive Officers, only 3 have been employed by the company for less than 5 years. Stability in management is often a key to the long-term success of a company. Harley-Davidson has maintained good company governance and currently is not plagued with any corporate scandals that seem to be prevalent with large companies. Risks Regulatory and Environmental The company’s products are subject to certification by the US Environmental Protection Agency (EPA) for compliance to emissions and noise standards as well as the California Air Resources Board. The motorcycles sold in California are subject to unique emissions standards that are typically higher than those found in the rest of the country. Overseas, the company faces regulatory emission standards that are higher than those established by the EPA, especially in Europe and Japan. The company must incur some research and development costs to comply to these ever increasing air and noise emission restrictions.




Recalls and Lawsuits In 2001, the company notified each owner of 1999 and 2000 model year motorcycles equipped with Twin Cam 88 and Twin Cam 88B engines that the warranty for the rear cam bearing had been extended by an additional five years or 50,000 miles. A lawsuit was filed against the company claiming that this bearing may be defective. The company issued the warranty under its own initiative and costs. Similar warranty claims and/or recalls may reduce profit margins as well as the perception of quality that allows Harley Davidson to charge a premium price in the market for its products. Competition Another risk to the long-term growth prospects of the company lie not with the traditional competitors, although they will cut into the advantages that Harley currently maintains, but with the small scale specialty custom manufacturers, such as Orange County Choppers and Milwaukee Motor Works. Independent custom shops such as these provide extremely customized bikes at premium prices to rival or surpass those offered by Harley-Davidson. For Harley’s target market, differentiation is a key element to desirability of the motorcycles. With the ability to produce only one motorcycle at a time to the exact requirements of the customer, these shops located all across the country provide a small but growing threat to the market share dominance Harley-Davidson currently enjoys. The proliferation of such television shows as American Chopper and Biker Build-Off as seen on the Discovery Channel and others attest to this growing trend. Brand Image Loss6 Perhaps the biggest risk to the long term growth prospects for Harley-Davidson is with the current trendiness of its products. Typically, the stronger the brand is with the older generation, the weaker it is with the younger generation. So, as a result of Harley-Davidson’s success with the current Baby-boomer generation, the brand image may actually hurt the company in the future with Generation X and beyond.




2000 % Change 2001 % Change 2002 % Change 2003 % Change 2004Net revenue 2943346 16% 3406786 20% 4090970 13% 4624274 8% 5015190COGS 1979572 14% 2253815 19% 2673129 11% 2958708 5% 3115655Gross Profit 963774 20% 1152971 23% 1417841 17% 1665566 14% 1899535

Financial Services income 140135 30% 181545 17% 211500 32% 279459 9% 305262Financial Services expense 102957 17% 120272 -11% 107273 4% 111586 5% 116662Operating income from financial services 37178 65% 61273 70% 104227 61% 167873 12% 188600

Income before provision for income taxes 548556 23% 673455 32% 885827 32% 1166035 18% 1379486Provision for income taxes 200843 17% 235709 30% 305610 33% 405107 21% 489720Net income 347713 26% 437746 33% 580217 31% 760928 17% 889766

Financials Income Statement Based on the previous 5 year’s growth of approximately 20%, the expected growth of Harley-Davidson for 2005 can conservatively speaking be around 14% with an earnings estimate of $1,032,128 or $3.50 per share. The following table shows the previous 5 years earnings with the upcoming 3 years projected out based on a semi-conservative growth rate of 14% in 2005 and 11% thereafter. Years 2005 and 2006 also show company analysts projections of earnings per share estimations. Growth figures are in ($000s).

2000 2001 2002 2003 2004 2005 2006 2007 2008 347,713 437,746 580,217 760,928 889,766 1,032,128 1,155,983 1,294,702 1,450,066 Growth 21% 25% 24% 14% 14% 11% 11% 11%

Earnings/Sh 1.48 1.97 2.58 3.02 3.50 3.92 4.39 4.92 Consensus 3.19 3.53

Looking at the company’s income statement a few key points can be ascertained. The income statement below shows the year over year net revenue has increased at a faster rate than the cost of goods sold. Based on this data, it can be said that the operating efficiency of the plant facilities are improving as new technology becomes available and lower cost methods of production are utilized.

It is also important to note that the overall net income has been very strong for the company for the last five years. This trend is likely to continue into the next few years and the company should see net income continuing to rise. The basic drivers behind earnings growth will be sales of new units. This is particularly true if the company can embrace its female constituents and foster more sales in overseas markets. Even amongst the traditional customer base, the new models introduced this year along with the housing boom where homeowners can “cash out” the equity built up in their homes to make purchases and

Figure 15 – Revenue Growth Estimates

Figure 16 – Income Statement Summary




the strengthening economy should all provide the catalyst for continued strong sales for this motorcycle manufacturer. Balance Sheet The balance sheet for the company is strong. The company has been able to increase shareholder equity by 23% over the last five years, while keeping long term debt at a minimum. The company has been able to repurchase some of its stock, which should also lift share price.

HDI Balance Sheet 2000 2001 2002 2003 2004 2005E 2006E 2007EAssets Cash 419736 439438 280928 329329 275159 Marketable securities 0 196011 514800 993331 1336909 Accounts receivable 98311 118843 108694 112406 121333 Finance receivables (current) 530859 656421 855771 1001990 1207124 Inventories 191931 181115 218156 207726 226893 Deferred income taxes 28280 38993 41430 51156 60517 Prepaid expenses 28147 34443 46807 33189 38337 Finance receivables 234091 379335 589809 735859 905176 PPE 754115 891820 1032596 1046310 1024665 Goodwill 54331 49711 49930 53678 59456 Other 96603 132365 122296 358114 227724 Total Assets 2436404 3118495 3861217 4923088 5483293 6334010.7 7123848 7913684.9 Liabilities Accounts Payable 169844 194683 226977 223902 244202 Accrued expenses 238390 304376 380496 407566 433053 Finance debt (current) 89509 217051 382579 324305 495441 Finance debt 355000 380000 380000 670000 800000 Long term 81707 158374 123353 86337 90846 Healthcare benefits 80666 89912 105419 127444 149848 Deferred income taxes 15633 17816 29478 125842 51432 Total Liabilities 1030749 1362212 1628302 1965396 2264822 2571695.2 2878828 3185961.2

Figure 17 – Balance Sheet




Balance Sheet (continued)

Year Assets Liabilities Current Ratio 2000 2,436,404,000 497,743,000 4.89 2001 3,118,495,000 716,110,000 4.35 2002 3,861,217,000 990,052,000 3.90 2003 4,923,088,000 955,773,000 5.15 2004 5,483,293,000 1,172,696,000 4.67

Figure 18 - Assets, Liabilities and Current Ratios

As evidenced in Figure 18, the average current ratio is 4.59. In general, the higher the current ratio, the more financially secure the company is. However, in Harley-Davidson’s case, most of the assets would be tied up in specific industry property plant and equipment that may be difficult to liquidate. Nonetheless, these are comfortable numbers.

Year Sales Inventory Turnover 2000 1,979,572,000 191,931,000 10.3 2001 2,253,815,000 181,843,000 12.4 2002 2,673,129,000 218,156,000 12.3 2003 2,958,708,000 207,726,000 14.2 2004 3,115,655,000 226,893,000 13.7

Average12.6 Figure 19 - Sales, Inventory and Turnover Ratios

The turnover ratio averaged 12.6 which means that Harley completely replenishes inventory on average 12.6 times per year or roughly once per month. In addition, the turnover ratio has been even higher in the last 2 years, providing evidence of strong sales and high demand for the manufacturer’s product lines. Cash Flows The company has been able to maintain an 18% increase in cash flow from operations (manufacturing and sales) over the last 5 years. The driving force behind the increase is simply increased sales. Harley-Davidson’s cash flow was particularly strong in 2003 because the company was celebrating its 100th anniversary. Several commemorative motorcycles were produced along with scores of collectible memorabilia and clothing. In addition, several events were held around the country to mark the occasion which certainly drew more people into dealership showrooms. A method to determine the true market value of a stock known as the discount cash flow model has been set up using the company’s cash flow statements and several assumptions about the growth projections of the company and the stock market in general.




Free Cash Flow Model

Ticker Company NameHDI Harley Davidson Motorcycles

2004 2003 2002 2001 2000 AverageAnnual Net Income 889.8 760.9 580.2 437.7 347.7 603.3Annual Depreciation 214.1 196.9 175.8 153.1 133.3 174.6Gain on Sale of Credit Card Business 0.0 0.0 0 0 -18.9 -3.8Employee Benefits 62.8 76.4 57.1 40.9 17.4 50.9Finance credit losses 3.1 4.1 6.2 22.2 9.9 9.1Securitizations -58.3 -82.2 -56.1 0 0 -39.3Finance Receivables -154.1 -154.8 -140.1 0 0 -89.8Pension Plan 0.0 -192.0 -153.6 -19.3 -12.8 -75.5Stock Options 51.5 13.8 14.5 44.9 35.9 32.1Income Taxes -41.5 42.1 38.6 -3.5 1.4 7.4Other 27.3 16.1 7.1 3 1.8 11.1Net changes in assets and liabilities -24.9 18.6 16.1 77.8 49.6 27.4Total adjustments 80.0 -61.0 -34.4 319.1 217.6 104.3

Cash from Operations 969.8 699.9 545.8 756.8 565.3 707.5

Annual CF Capital Expenditures -213.6 -227.2 -323.9 -290.4 -203.6 -251.7Finance Receivables Acquired -2,394.6 -2,090.2 -1,731.2 -4,387.3 -3,556.2 -2,831.9Finance Receivables Collected 274.7 252.7 230.2 3,123.9 2,727.7 1,321.8Proceeds from Securitizations 1,847.9 1,724.1 1,246.3 987.7 723.9 1,306.0Collection of retained securitized interests 125.7 118.1 90.0 0.0 0.0 66.8Purchase of marketable securities -1,091.3 -1,538.5 -1,508.3 -248.0 0.0 -877.2Sales and redemptions of marketable securities 742.3 1,145.0 1,253.7 52.0 0.0 638.6Purchase of remaining interest in joint venture 9.5 0.0 0.0 1.9 18.8 6.0Other, net 10.7 9.7 22.8 -7.5 -14.1 4.3

Cash from Investments -688.7 -606.3 -720.4 -767.7 -303.5 -617.3

Annual CF Issuance of Medium term notes 0.0 399.9 0.0 0.0 0.0 80.0Commercial Paper 305.0 -175.8 165.5 152.5 -16.7 86.1Dividends -119.2 -59.0 -41.5 -35.4 -30.1 -57.0Purchase of common stock -564.1 -103.9 -56.8 -111.6 -126.0 -192.5Issuance of common stock 62.2 19.4 12.7 28.8 14.6 27.5

Cash from Financing -316.1 80.6 79.9 34.3 -158.2 -55.9

Free Cash FlowCash from Operations 969.8Cash Flow from capital expenditures -251.7Cash Flow from Financing 0.0Free Cash Flow 718.1

14.50% 9.51%Free Cash Growth Discount Discounted

Year Flow Rate Rate CF0 2004 718.1 1.0951 718.11 2005 822.2 1.15 1.0951 750.82 2006 941.4 1.15 1.0951 784.93 2007 1,077.9 1.15 1.0951 820.74 2008 1,234.2 1.15 1.0951 858.15 2009 1,413.1 1.15 1.0951 897.16 2010 1,618.1 1.15 1.0951 938.07 2011 1,852.7 1.15 1.0951 980.78 2012 2,121.3 1.15 1.0951 1,025.49 2013 2,428.9 1.15 1.0951 1,072.1

10 2014 2,781.1 1.15 1.0951 1,120.911 2015 3,184.4 1.15 1.0951 1,171.912 2016 3,646.1 1.15 1.0951 1,225.313 2017 4,174.8 1.15 1.0951 1,281.114 2018 4,780.1 1.15 1.0951 1,339.515 2019 5,473.2 1.15 1.0951 1,400.5

38,267.4 16,385.1

Annual Common Shares Outstanding 274.4




The model takes into account the most recent cash flow statement’s net income and determines the net present value of the net income for 15 years into the future. Provided that the assumptions are correct, Harley-Davidson’s stock price is projected to be $59.71. With a current price of $52.11 per share as of August 12, the upside potential is around 15%.

Projected Price 59.71Current Price 52.11Discount (Premium) to Current Price 7.60Possible Price Appreciation 14.59%

Cost Of EquityBeta 1.13Risk Free Rate (3-mo t-bill) 3.43%Mkt Premium 5.38%CAPM = Expected return=R(f)+beta (Mkt Prem) 9.51%# of diluted shs outstanding (000) 274,400.0Price 52.11Mkt Value of Equity (000) 14,299Long term rate of growth-company 14.500

Mkt PremiumRecent Price 1230.00Div/Sh 10.00Long term rate of growth-the market 8.00%K 8.81%Mkt Premium (K-Risk Free Rate) 5.38%

The discount cash flow model is based on a cost of capital rate of 9.51%, a risk free rate of 3.43% and a long term growth rate for the company at 14.5%. It is believed that this growth rate can be maintained for several years to come based on the previously described economic and demographic factors. Despite the company guidance suggesting a 7 to 9% growth rate, it is believed these figures are overly conservative and much higher growth rates should be anticipated. Long-Term Growth Rate 10 12 14 16 18 20

8 43.3 49.82 57.56 66.76 77.7 90.729 40.09 45.95 52.89 61.12 70.88 82.48

10 37.24 42.51 48.75 56.12 64.86 75.21

From the discounted cash flow model a sensititivty matrix can be obtained. The possible price outcomes range from $37.24 to $90.72. The middle ground estimate leads the author to the conclusion that the stock is currently undervalued and should hit the $60 price target within the next 6 months.

Mar

ket R

etur

ns

Figure 20 – Projected Stock Price Estimation Using DCF Model

Figure 21 – Price Sensitivity Analysis




DuPont AnalyticsHARLEY-DAVIDSON INCORPORATED (HDI) StockVal ®Price 51.410 08/05/05 FYE Dec

INT TAX ASSET

MARGIN% BURDEN BURDEN% TURN LEVERAGE

EBIT EBT T Sales Assets

------- ------- 1 - ---- ------- ------- ROE Acct ROE

Sales EBIT EBT Assets Equity Rpt% Adj% Adj%

2004 27.51 1.00 64.50 0.96 1.68 28.81 0.00 28.81

2003 25.22 1.00 65.26 1.05 1.69 29.32 0.00 29.32

2002 21.65 1.00 65.50 1.17 1.75 29.09 0.00 29.09

2001 19.77 1.00 65.00 1.23 1.76 27.69 0.00 27.69

2000 18.64 1.00 63.39 1.29 1.77 27.09 -0.53 26.56

1999 16.95 1.00 63.50 1.23 1.84 24.39 0.00 24.39

1998 16.11 1.00 63.50 1.19 1.90 23.00 0.00 23.00

1997 15.68 1.00 63.00 1.21 1.96 23.37 0.00 23.37

1996 14.87 1.00 63.00 1.32 2.01 28.69 -3.91 24.78

1995 13.13 0.99 63.10 1.61 1.81 24.25 -0.31 23.94

1994 13.56 1.00 61.51 1.92 1.59 27.51 -2.13 25.38

1993 13.66 1.00 60.05 1.86 1.52 -3.60 26.72 23.12

1992 11.79 0.94 62.13 1.83 1.57 18.76 1.00 19.76

1991 12.19 0.90 62.44 1.69 1.90 16.93 5.18 22.11

1990 8.57 0.85 61.18 2.20 2.22 21.31 2.69 24.00

1989 8.97 0.75 61.52 2.03 2.81 23.71 -0.24 23.47

1988 9.68 0.67 59.02 1.81 4.24 25.91 7.05 32.96

1987 8.45 0.57 57.28 1.82 7.96 47.64 -7.96 39.68

Return on Equity In addition to strong cash flows and a healthy balance sheet, the company has attained a phenomenal return on equity since its inception in 1986. Despite the numerous recessions, break-out periods and times of stagnant growth during this almost 20-year span, the company has been able to achieve a return of approximately 23% year in and year out. The management is able to achieve this by constantly improving the sales margins, reducing the tax burdens and leveraging debt to maximize investment opportunities. The trailing twelve month returns for the management have been 29.77, 18.26 and 22.25 percent for return on equity, return on assets and return on investments respectively. These figures are incredibly remarkable considering the global trend of manufacturers to outsource the labor intensive portions of the business to overseas facilities. Despite the above average labor costs, the company is able to achieve such strong returns.

Figure 22 – Dupont Analysis Note: highlighted area added by author for emphasis.




StockVal®HARLEY-DAVIDSON INCORPORATED (HDI) Price 51.41995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

PRICE / YEAR-FORWARD EARNINGS8

16

24

32 HI 39.6 LO 13.3 ME 21.1 CU 14.5

08-04-199508-05-2005

PRICE / EBITDA6

12

18

24 HI 25.3 LO 8.3 ME 13.6 CU 9.0

08-04-199508-05-2005

PRICE / SALES0

2

4HI 5.58 LO 1.47 ME 3.47 CU 2.94

08-04-199508-05-2005

PRICE / CASH FLOW ADJUSTED8

16

24

32 HI 37.0 LO 12.0 ME 19.3 CU 13.5

08-04-199508-05-2005

Valuation Currently Harley-Davidson stock looks relatively undervalued. It is currently priced below its 10 year mean for the P/E, P/EBITDA, P/S and P/CF by a considerable margin. It is interesting to note that the late 90’s represented a period for the company highlighted by strong stock price appreciation and valuation increases as evidenced in Figure 23. All will remember this was a time of the dot-com stock market bubble and record-setting economic growth. It is likely that since, for the most part, all stocks were rising, Harley-Davidson stock was also rising as the valuations were well above the mean. However, unlike the dot-com stocks that eventually destroyed trillions of dollars in market capitalization when the bubble burst, Harley-Davidson has lived up to its expectations and delivered its expected price appreciation. Simply put, there was no bubble in the price of Harley-Davidson stock. The company is well rooted and here to stay. Sales have met or exceeded expectations time and time again and should continue to do so for at least the next five years.

Figure 23 – Valuation Ratios





PRICE / BOOK VALUE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd1.0

1.5

2.0

2.5 HI 2.89 LO 1.10 ME 1.78 CU 1.87

08-04-199508-05-2005

REVENUES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd1

2

4

HI 2.40 LO 1.00 ME 1.60 CU 2.17

09-30-199506-30-2005

REVENUE-PER-SHARE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd1

2

4

HI 2.26 LO 1.00 ME 1.54 CU 2.19

09-30-199506-30-2005

EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd1

2

4

HI 4.03 LO 1.00 ME 1.65 CU 3.90 FY1 3.89 FY2 3.92

09-30-199506-30-2005


RETURN ON EQUITY RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd1.2

1.4

1.6

1.8 HI 2.00 LO 1.20 ME 1.38 CU 1.70

09-30-199506-30-2005

RETURN ON CAPITAL RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd1

2

3HI 3.58 LO 1.96 ME 2.25 CU 2.87

09-30-199506-30-2005

NET PROFIT MARGIN ADJUSTED RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.8

1.2

1.6

2.0 HI 2.15 LO 1.17 ME 1.37 CU 2.11

09-30-199506-30-2005

DIVIDEND YIELD RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.0

0.2

0.4

0.6 HI 0.73 LO 0.15 ME 0.30 CU 0.70

08-04-199508-05-2005

Figures 24 and 25 – Management Effectiveness Relative to S&P 500

In addition to a currently underpriced security, investors in Harley-Davidson are also getting a solid performing stock. As compared to the broader market, Harley-Davidson has produced above average revenues, revenues-per-share, return on equity, return on capital, net profit margins, dividend yields and earnings (Figures 24 and 25). All while maintaining a very low debt level (Figure 26).




Figure 26 – Management Effectiveness

Figure 27 – Valuation Estimates

It would appear that the current stock price indicates a market underweighting. Just how much does the market undervalue this security? Using the company’s historical averages, and target ratios, the fair value can be determined. From the data outlined in Figure 27, the average of the five valuations indicates a price target of $60.29. Since the current valuation ratios are well below the mean, even a conservative reversion towards the mean should lead to stock price appreciation.

Absolute Valuation

High Low Mean Current Target Multiple

Target E, S, B, etc/Share

Target Price (F x G)

P/Forward E 39.6 13.3 21.1 14.5 19 3.29 62.51 P/S 5.58 1.47 3.47 2.94 3.25 18.96 61.63 P/B 12.1 3.7 6.1 4.5 5.5 12.69 69.77 P/EBITDA 25.3 8.3 13.6 9.0 12 5.32 63.8 P/CF 37.0 12.0 19.3 13.5 18 2.43 43.75


LONG-TERM DEBT / CAPITAL %0

1

2

3

4

HI 3.7 LO 0.0 ME 0.6 CU 0.0

12-31-199512-31-2004

RETURN ON CAPITAL %20

22

24

26

28

30

32

HI 30.2 LO 21.2 ME 25.2 CU 29.5

09-30-199506-30-2005

RETURN ON EQUITY %20

22

24

26

28

30

32

HI 30.1 LO 21.8 ME 25.4 CU 29.5

09-30-199506-30-2005





PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.8

1.0

1.2

1.4 HI 1.43 LO 0.82 ME 1.12 CU 0.97

08-04-199508-05-2005

PRICE / EBITDA RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd1

2

4

HI 2.68 LO 1.15 ME 1.86 CU 1.17

08-04-199508-05-2005

PRICE / SALES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd1.0

1.5

2.0

2.5 HI 2.97 LO 1.17 ME 1.95 CU 2.02

08-04-199508-05-2005

PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.8

1.2

1.6

2.0 HI 2.31 LO 1.11 ME 1.58 CU 1.20

08-04-199508-05-2005

Figure 28 – Valuations compared to the S&P 500

Even when compared to the S&P 500, this security appears to be undervalued. Looking at the historical averages relative to the S&P 500, this stock is well below the mean for all valuations except Price/Sales and even this number is not considerably higher than the mean.

In summary, from a valuations standpoint, a prospective investor in Harley-Davidson stock is getting an undervalued, over-performing stock as compared to other stocks in the S&P 500. As soon as the market realizes this bargain, the price should provide significant gains in the short run.




Figure 29 – Resistance and Support Levels for HDI

Technical Analysis7 As stated earlier, the stock price dropped 17% in one trading day following a negative company release detailing the decline in the number of units to be shipped for the second half of 2005. The market reacted to the news by sending the price of the stock to its 2 year low of $46. This price level is obviously a price support and a psychological barrier inhibiting further decline. Since then, the stock price has steadily increased over the last few months as value investors looking for bargains, have been purchasing the stock. It is believed based on the past trends, that the stock will settle back towards the $58 to $62 range. Investors are realizing that the market oversold back in April and this is the primary reason for the relatively quick recovery. Expect the price to fully recover by early Spring 2006.

Recommendation Harley-Davidson, Inc., as a company, has enjoyed some outstanding revenues and returns over the last ten years. Of course much of that success has been priced into the stock at its current price levels. But the author believes strongly that the market correction back in April was overdone and reiterates the progressive return back to the previous price levels.

Support Level

Resistance

Recovery




In summary, the valuation, DCF and technical analysis estimates point to $60 per share as the near term price target.

Method Target DCF $59.71 Valuation $60.29 Technical Analysis $58-$62

This is not to say that investors in Harley-Davidson stock should adopt a “buy and hold” strategy in regards to this holding. The long term prospects for this company are more discouraging. As the baby-boomer population ages, psychology suggests that the generation replacing them is less likely to purchase Harley-Davidson products. If the manufacturer cannot embrace female riders or obtain a stronger presence in the overseas arenas, a drop in unit sales is might result. A good point for the stock is that it seems to weather the economic environment fairly well. Perhaps this is because Harley’s customers are more comfortable in their position in life and are not as susceptible to becoming unemployed or seeing wage decreases. The customer base tends to have fairly above average incomes when compared to the population as a whole. However, the strategy with any stock purchase should be to realize gains. In that light, the recommendation is to purchase the stock at its current price. Once the price approaches or hits the price target, close the position. It is not recommended to hold the position longer than one year regardless of the price past one year. There are too many long-term uncertainties to speculate on the success or failure of the business. However, if past performance is any indication, Harley-Davidson will still do well. But as is often said, “Past performance is not a predictor of future results.” Acknowledgements The author would like to especially thank Mr. Royce West for his help in providing the tools necessary to prepare this analysis. I have learned a great deal from his course and hopefully will parlay some of these techniques into a future career in investing. I would also like to thank my wife who has tolerated my absence for the past three months while I have been attempting, sometimes futilely to mine meaningful data from the StockVal computers in the dark recesses of Mason Hall.




References

1. Harley-Davidson SEC filings, 2004 10-K 2. Business Today, Keeping the faith, August 14, 2005 3. July 2005 Consumer Confidence Index, The Conference Board. 4. Census Bureau statistics 5. Associated Press Newswires, Number of women bikers growing. August 12, 2005. 6. Tribune Business News, Harley-Davidson banks on baby boomers. July 01, 2005. 7. Getting Started in Technical Analysis, Jack D. Schwager, John Wiley and Sons, pgs

148-149.




Exhibit 1 HARLEY-DAVIDSON, INC.

CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2004, 2003 and 2002

(In thousands, except per share amounts) 2004

2003 2002

Net revenue

$ 5,015,190 $ 4,624,274

$ 4,090,970

Cost of goods sold 3,115,655

2,958,708 2,673,129

Gross profit 1,899,535

1,665,566 1,417,841

Financial services income

305,262 279,459

211,500

Financial services expense 116,662

111,586 107,273

Operating income from financial services 188,600

167,873 104,227

Selling, administrative and engineering expense

726,644 684,175

639,366

Income from operations 1,361,491

1,149,264 882,702

Investment income, net 23,101

23,088 16,541

Other, net (5,106) (6,317 ) (13,416)

Income before provision for income taxes 1,379,486

1,166,035 885,827

Provision for income taxes 489,720

405,107 305,610

Net income $ 889,766

$ 760,928 $ 580,217

Basic earnings per common share

$ 3.02 $ 2.52

$ 1.92

Diluted earnings per common share $ 3.00

$ 2.50 $ 1.90

Cash dividends per common share $ .405

$ .195 $ .135

The accompanying notes are an integral part of the consolidated financial statements.





CONSOLIDATED BALANCE SHEETS December 31, 2004 and 2003

(In thousands, except share amounts) 2004

2003

ASSETS

Current assets:

Cash and cash equivalents $ 275,159

$ 329,329

Marketable securities 1,336,909

993,331

Accounts receivable, net 121,333

112,406

Current portion of finance receivables, net 1,207,124

1,001,990

Inventories 226,893

207,726

Deferred income taxes 60,517

51,156

Prepaid expenses and other current assets 38,337

33,189

Total current assets 3,266,272

2,729,127

Finance receivables, net

905,176 735,859

Property, plant and equipment, net 1,024,665

1,046,310

Goodwill 59,456

53,678

Other assets 227,724

358,114

$ 5,483,293 $ 4,923,088

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable $ 244,202

$ 223,902

Accrued expenses and other liabilities 433,053

407,566

Current portion of finance debt 495,441

324,305

Total current liabilities 1,172,696

955,773

Finance debt

800,000 670,000

Other long-term liabilities 90,846

86,337

Postretirement healthcare benefits 149,848

127,444

Deferred income taxes 51,432

125,842

Commitments and contingencies (Note 6)

Shareholders’ equity:

Series A Junior participating preferred stock, none issued —

—

Common stock, 329,908,165 and 326,489,291 shares issued in 2004 and 2003, respectively

3,300 3,266

Additional paid-in capital 533,068

419,455

Retained earnings 3,844,571

3,074,037

Accumulated other comprehensive (loss) income (12,096 ) 47,174

4,368,843 3,543,932

Less:

Treasury stock (35,597,360 and 24,978,798 shares in 2004 and 2003, respectively), at cost

(1,150,372 ) (586,240)Total shareholders’ equity

3,218,471 2,957,692

$ 5,483,293 $ 4,923,088






CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2004, 2003 and 2002

(In thousands) 2004

2003 2002

Cash flows from operating activities:

Net income $ 889,766

$ 760,928 $ 580,217

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation 214,112

196,918 175,778

Provision for long-term employee benefits 62,806

76,422 57,124

Provision for finance credit losses 3,070

4,076 6,167

Gain on current year securitizations (58,302) (82,221 ) (56,139)

Net change in wholesale finance receivables (154,124) (154,788 ) (140,107)

Contributions to pension plans —

(192,000 ) (153,636)Tax benefit from the exercise of stock options

51,476 13,805

14,452

Deferred income taxes (41,513) 42,105

38,560

Other 27,301

16,051 7,057

Net changes in current assets and current liabilities (24,866) (18,644 ) 16,089

Total adjustments 79,960

(98,276 ) (34,655)Net cash provided by operating activities

969,726 662,652

545,562

Cash flows from investing activities:

Capital expenditures (213,550) (227,230 ) (323,866)

Finance receivables acquired or originated (2,394,644) (2,090,201 ) (1,731,169)

Finance receivables collected 274,670

252,705 230,153

Proceeds from securitizations 1,847,895

1,724,060 1,246,262

Collection of retained securitization interests 125,732

118,113 89,970

Purchase of marketable securities (1,091,326) (1,538,548 ) (1,508,285)

Sales and redemptions of marketable securities 742,284

1,145,000 1,253,719

Purchase of remaining interest in joint venture (9,500) —

—

Other, net 10,689

9,690 22,813

Net cash used in investing activities (707,750) (606,411 ) (720,403)

Cash flows from financing activities:

Proceeds from issuance of medium term notes —

399,953 —

Net increase (decrease) finance credit facilities and commercial paper

305,047 (175,835 ) 165,528

Dividends paid (119,232) (58,986 ) (41,457)

Purchase of common stock for treasury (564,132) (103,880 ) (56,814)

Issuance of common stock under employee stock option plans 62,171

19,378 12,679

Net cash (used) provided by financing activities (316,146) 80,630

79,936

Net increase (decrease) in cash and cash equivalents

(54,170) 136,871 (94,905)

Cash and cash equivalents:

At beginning of year 329,329

192,458 287,363

At end of year $ 275,159

$ 329,329 $ 192,458





Exhibit 4 - Population by Sex and Age




Exhibit 5 – Population Projections by Sex and Age




Exhibit 6 – Raw Data for Regression Analysis

Cur

rent

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Exhibit 7 – Output from regression analysis using all independent variables SUMMARY OUTPUT

Regression StatisticsMultiple R 0.9986502R Square 0.997302221Adjusted R Square 0.996518995 RevenueStandard Error 75.74769014Observations 41

ANOVAdf SS MS F ignificance F

Regression 9 65753816.19 7305979.577 1273.326173 3.03E-37Residual 31 177869.0894 5737.712562Total 40 65931685.28

Coefficients Standard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept -17954.32922 6608.838893 -2.716714616 0.010688091 -31433.14 -4475.513 -31433.14 -4475.513Disp Inc 1.583308213 0.604432823 2.619494101 0.013509895 0.350559 2.816057 0.350559 2.816057GDP -0.049390128 0.331399719 -0.149034912 0.882491408 -0.725284 0.626504 -0.725284 0.626504Pers Cons 0.940246327 0.485673392 1.935964255 0.062036551 -0.050291 1.930784 -0.050291 1.930784Pers Inc -1.437364279 0.327713732 -4.386036159 0.000123651 -2.105741 -0.768988 -2.105741 -0.768988Fed Funds 40.01077901 23.89789824 1.674238404 0.104145497 -8.729306 88.75086 -8.729306 88.75086Unemploy 166.6070212 77.51810737 2.149265854 0.039531676 8.5078 324.7062 8.5078 324.7062Pers Saving -42.43789775 41.82259902 -1.014712111 0.318097761 -127.7357 42.85985 -127.7357 42.85985CPI 17.86363254 7.226365115 2.472008022 0.019128945 3.125364 32.6019 3.125364 32.6019Population 42.32178376 35.61735846 1.18823477 0.24376481 -30.3203 114.9639 -30.3203 114.9639

Harley Davidson Stock Report - fisher.osu.edu Summer Harley... · Harley-Davidson is also very...

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