Investment analysis of Harley-Davidson, Inc. 2004-2006

Investment Report and Analysis

harley-davidson, inc.

COMPANY OVERVIEW

Harley-Davidson, Inc. is the parent company to a group of companies doing business as Harley-Davidson Motor Company including Buell Motorcycle Company and Harley-Davidson Financial Services. Harley-Davidson Motor Company is a manufacturer of heavyweight motorcycles along with a complete line of motorcycle parts, apparel, accessories and other general merchandise. Harley-Davidson manufactures five lines of motorcycles. The corporate headquarters of Harley-Davidson are located in Milwaukee, Wisconsin. Harley-Davidson employs approximately 9,000 individuals.

2004-2006 Annual Balance Sheet

Harley-Davidson, Inc.

Annual Balance Sheet

Currency in Millions of U.S. Dollars as of: Dec

Restated Dec

Restated

Dec

Assets Cash and Equivalents

Short-Term Investments

TOTAL CASH and SHORT-TERM INVESTMENTS

Accounts Receivable

TOTAL RECEIVABLES

Inventory

Prepaid Expenses

Finance Division Loans and Leases, Current

Deferred Tax Assets, Current

TOTAL CURRENT ASSETS

Gross Property Plant and Equipment

Accumulated Depreciation

NET PROPERTY PLANT and EQUIPMENT

Goodwill

Finance Division Loans and Leases, Long-Term

Deferred Tax Assets, Long-Term

Other Long-Term Assets

TOTAL ASSETS

LIABILITIES & EQUITY Accounts Payable

Accrued Expenses

Current Income Taxes Payable

Other Current Liabilities, Total

TOTAL CURRENT LIABILITIES

Finance Division Debt, Non-Current

Pension & Other Post-Retirement Benefits

Deferred Tax Liability Non-Current

Other Non-Current Liabilities

TOTAL LIABILITIES

Common Stock

Additional Paid in Capital

Retained Earnings

Treasury Stock

Comprehensive Income and Other

TOTAL COMMON EQUITY

TOTAL EQUITY

TOTAL LIABILITIES and EQUITY

There are some interesting changes noted in the statement of variation for Harley-Davidson in 2005 when compared to 2004 in that there were three factors, which led to an increase in the net income of Harley-Davidson including; (1) an increase in net revenue; (2) an increase in financial services income; and (3) decrease in other expenditures. The largest increase was the percentage change in financial services income at 8.63% while the net revenue increase was at 6.52% and other expenditures dropped by 1.12% in 2005. The total amount of increase in net income for 2005 is the total of $353,457,000.00. This increase was offset by increased expenditures incurred supporting the increase of net revenue. Investments actually dropped by 1.32$ in 2005 due to negative affects of the increase in cost of goods sold, the increase in financial services expense, increases in selling, administrative and engineering expenses, an increase in provision for income taxes, and finally a decrease in investments income. The largest increase was in the financial services expenses, which rose by 20%. Investment income was the lowest contributing component in the decrease which fell by 1.32% and the cost of goods sold rose by 5.97% while increase in selling administrative and engineering expense rose by approximately 4.88% with the increase in income tax provision rose by 7.85%.

Gross profit for 2005 is stated at $2,040,499,000 which is up by 7.5% from 2004. The net income rose by 8% to $959,604,000 for 2005. In April 2005, Harley-Davidson shares posted the biggest drop in more than ten years at approximately $3 billion from their stock market value. In 2005, 33.5% of shipments were higher priced touring models. Segment reporting is used by Harley-Davidson for reporting in business and foreign operations. Harley-Davidson operates in two business segments and specifically the Motorcycle and Financial segments. These two are managed separately due to the fundamental differences in operations. Geographically Harley-Davidson is divided into five segments:

1) United States;

2) Europe;

3) Japan;

4) Canada; and 5) Other.

The following chart illustrates the net revenues for motorcycles by geographical segments.

Harley-Davidson - Retail Revenues (by Segment)

Review of forecasts for Harley-Davidson at year-end 2005 shows that U.S. motorcycle sales experienced an 11% rise in the first six months of 2005 and that Harley-Davidson's share of the motorcycle market were at 23.7% behind Honda's 27.4%. The 2007 models were positively received with Harley-Davidson buying back 9.9 million shares in the first two quarters of 2006 at a cost of $499.5 million. In July 17, Harley-Davidson was authorized for repurchase of 10 million more shares and this positively affects Harley-Davidson, Inc. In that investors and companies alike are positively charged toward stock buybacks and that this boosts per-share earnings as well as easing stock-options awards.

Reuter's News Stock Quote for Harley-Davidson, Inc. HOG (NYSE) for December 30, 2007 includes the following:

47.15USD

Price http://stocks.us.reuters.com/lib/img/arrowNeg.gif

Percent http://stocks.us.reuters.com/lib/img/arrowNeg.gif

Previous Close $47.18

Open $47.01

Day High $47.95

Day Low $47.01

52-Week High $74.03

52-Week Low $44.37

Volume 886.3K

Avg Volume 1.8M

Mkt Cap. $11.40B

Shares Out 241.5M

EPS (TTM) $3.92

Div & Yield 1.20 (2.55%)

Ex Div Date 12/19/07

In a 2007, Financial News and Investment report entitled: "HOG (Harley-Davidson) Analysis" it is stated that "Harley-Davidson (HOG) is the iconic American motorcycle manufacturer." Harley-Davidson is actually more than a brand in various ways in that very few companies have their brand tattooed on the bodies of customers and other individuals. Recently, Harley-Davidson stock has declined and this is stated to be because of "stagnant or slightly declining year over year sales." (Financial News and Investments, 2007) the report relates that Harley-Davidson has "a P/E of '12 and price to cash flow of about 13." (2007) Price to book value is approximately 4 and the dividend yield for the stock is approximately 2%. Harley-Davidson stock is relatively cheap and extremely difficult to "replicate the Harley brand for the market cap of the company which is about 13 billion. Intangibles do add significantly to the book value of Harley-Davidson. When examining the cash flows and return on equity the cash flow over the past three years have been 960, 762, and 998 million dollars respectively while the free cash flow has experienced a variation from 708 to 782 million respectively with a return on equity at approximately 29% to 39% most recently. Year-over-year sales in the United States has declined for Harley-Davidson by approximately 5%. Even allowing consideration for the cash flow stagnancy of Harley-Davidson, Harley-Davidson stock will still remain a sound long-term investment although immediate upside on the investment may not be forthcoming.

The following figure illustrates the decline in Harley investor stock over the first three quarters of 2007 from approximately 72.00 to 47.00 during that span of time.

Harley-Davidson Investor Stock Decline During First Three Quarters of 2007

1d

5d

3m

6m

1y

2y

5y max

Everyone is not so optimistic about investing in the Harley-Davidson, Inc. stock and as reported in the work entitled: "Disturbing Trends at Harley-Davidson: Why it's Time to Sell" states in a April 10, 2007 'Seeking Alpha' Transport Stock investment analysis that since Reese Fund analyst, Wes Golladay made the suggestion that inventory issues are likely to plague HOG that after statistical work revealed some "disturbing trends in one of America's great brands." (Seeking Alpha, 2007) Specifically stated is: "These trends lead us to assign a Sell rating to Harley-Davidson and a near-term price target of $50 a share. Stated are the following thesis of the investment analysis being reported:

Dealer inventory contributing significant EPS

Delivery Estimate Indicates Earnings Miss;

No Work-off in Q1 Dealer Inventory; and a Inventory Balloon. (Seeking Alpha, 2007)

By the end of 2006 it is related in this report that dealer lots contained $1.00 additional EPS attributed to overhand from over-delivery in the previous 24 months leaving investors paying approximately 18x PE TTM vs. The current 15.6x TTM. Additionally HOG's EPS delivery estimates at 64,000-70,000 has been statistically stated to have a high probability of being quite lower than the going.73 estimate on the street with the model strike Q1 in the range of.53 -.62 a share. (Seeking Alpha; 2007; p.1; paraphrased) Next, no retail inventory was expected to have been worked off during the 2nd quarter of 2007 being reported "even with a strike-reduced shipment count for Q1" resulting in shipping needs being much lower for the remainder of the year and to include lower pressures in pricing. Finally, the Seeking Alpha Transport Stocks investment analysis relates that a survey conducted showed that there is 2 1/2 to 3 1/2 more inventory than in the first quarter of 2004.

During this quarter, the stock risk grew for downgrading of stock in an environment of growing pressure upon what was already stock exceeding projected costs for the Harley-Davidson company and its investors. Seeking Alpha undertook this investment analysis through use of a methodology that had three specific tools for research in arriving at the reports conclusions which were the tools of: (1) an EPS logarithmic regression model that uses seasonality, shares outstanding and deliveries to predict HOG EPS; (2) a Holt-Winter's model to help predict Harley retail sales, trend and seasonality; and (3) a Survey of 56 dealerships online new inventory conducted between March 28th and March 30th. (Seeking Alpha, 2007)

II. Over-Delivery to Dealer Lots - Backlash Against New Stock Owners

It is noted in this report that motorcycle sales are seasonal yet HOG's revenues are not therefore, if operational expense is to be reduced "the company delivers cycles consistently throughout the year. Unfortunately, this crates the temptation to beat earnings by shipping more cycles than necessary." (Seeking Alpha, 2007) Seeking Alpha reports tracking from Q1 2004 where sales and deliveries were reported and the trend begins to emerge where HOG did not attempt to balance sales and deliveries over time as shown in the following figure.

Harley-Davidson Retail Sales and Deliveries

Source: Seeking Alpha (2007)

Over the past four years, account receivable growth has outpaced sales and the result is there is more inventory on dealer's lot than at any time in the history of HOG. The analysis states: "If the additional dealer inventory build was taken out of Harley's EPS from the previous two years and shipments evenly distributed throughout the quarters then Harley would have reported $3.41 last year and $3.14 in 2005 or a full $1.00 less of EPS over the past two years. Without dealer build, HOG would have reported net income without inventory build of $891 MM in 2006 and $838 MM in 2005 versus $889 MM in the base year 2004 placing the current P/E of the firm at an estimated 18x versus the current 15.6x. " (Seeking Alpha, 2007)

Accounts Receivable Trends Over Past Four Years

Source: Seeking Alpha (2007)

The Seeking Alpha analysis states that investigation of Harley-Davidson makes it "readily apparent there was a high correlation between deliveries of new cycles and the company's EPS. By controlling for the 15% of share buyback Harley has engaged in since q1 2004, a robust EPS model was built that uses deliveries, shares outstanding, and seasonality to determine the company's EPS from 2002 forward." (Seeking Alpha, 2007) the model reportedly tested "extremely well" in the prediction of future EPS when the current year is unknown results in an average miss of -.001 cents which is a standard deviation of.039 cents, a mean average percentage error (MAPE) of 5%, and an R2 equal to 94%." (Seeking Alpha, 2007) the analysis states conclusions that this analysis shows that HOG did as many companies do in their aspiration to beat the market and near-term estimates however it appears that HOG managed this through "using its dealer network as an unwitting accomplice, allowing it to increase EPS and hoodwink $7.50/share from shareholders based on the current 15 P/E multiple." (Seeking Alpha, 2007) However, Reese Fund analysts forecast that HOG is likely to be "forced to rob today's shareholder in order to pay for yesterday's. Given that net income without dealer build would have been flat for 2004 versus 2006, the apparent slowing in retail sales, and the impending Q1 earnings miss, we assign a sell to HOG stock and a near-term price target of $50 a share." (Seeking Alpha, 2007)

III. Key Developments

Key developments reported for Harley-Davidson include a Reuters news report that "Harley-Davidson Inc.'s Board approved a new share repurchase program for up to 20 million share's of the company's common stock with no dollar limit or expiration date. It is reported that HOG's price was down 0.85% after the transaction was announced on December 11, 2007.

The fourth quarter of 2007 met with an announcement of Harley's Davidson's Board of Directors approval of a $0.30 per share cash dividend payable to the holder of record of the Company's common stock on December 21, 2007. Additionally stated is the announcement of Harley-Davidson that a modest decline in revenue is expected with a lower operating margin and diluted earnings per share to decrease 4% to 6% compared to fiscal 2007. The report additionally states:

The Company reported EPS of $3.92 on revenue of $5.75 billion in fiscal 2006. For fiscal 2008, the Company anticipates that the U.S. retail motorcycle environment will continue to be challenging and expects moderate revenue growth, lower operating margin and diluted EPS to grow between 4% and 7% compared to fiscal 2007. According to Reuters Estimates, analysts are expecting the Company to report EPS of $3.73 on revenue of $5.68 billion for fiscal 2007 and EPS of $3.87 on revenue of $5.75 billion for fiscal 2008." (Reuters: Key Developments, 2007)

Finally, it is reported by Reuters News that Harley-Davidson communicates and expectation of rise in earnings from approximately 4% to 7% in 2008 with analysts stating an expectation for an EPS of $4.05 for fiscal 2007 and $4.45 for fiscal 2008. The following figure is an industry income statement analysis for Harley-Davidson as of December 30, 2007.

Income Statement Analysis for HOG (December 30, 2007)

Totals HOG Industry Range

Total Revenue 6.2B -48.8K

13.3B

Gross Profit 2.4B -52.1K

3.5B

Operating Income 1.6B -33.2M

1.6B

Net Income 1.0B Not meaningful

Source: Business Week (2007)

The annual income statement for the Harley-Davidson Company for the years 2003 through 2006 are shown in the following figure. In this figure, one notes that revenues experienced quite a rise from December 31, 2003 until the same day the following year and kept increasing steadily in 2005 and 2006. Due to over-delivery of stock, the operating income shows growth as do Selling General & Administration expenses and the Costs of Good Sold.

Harley-Davidson, Inc.

Annual Income Statement

Currency in Millions of U.S. Dollars as of: Dec 31

Restated Dec 31

Restated

Dec 31

Revenues

TOTAL REVENUES

Cost of Goods Sold

GROSS PROFIT

Selling General & Admin Expenses, Total

OTHER OPERATING EXPENSES, TOTAL

OPERATING INCOME

Interest and Investment Income

NET INTEREST EXPENSE

Other Non-Operating Income (Expenses)

EBT, EXCLUDING UNUSUAL ITEMS

EBT, INCLUDING UNUSUAL ITEMS

Income Tax Expense

Earnings from Continuing Operations

NET INCOME

NET INCOME to COMMON INCLUDING EXTRA ITEMS

NET INCOME to COMMON EXCLUDING EXTRA ITEMS

Business Week reports Harley-Davidson Inc.'s 'Ratio Data TTM as of: 09-30-20-07 to be as follows for profitability; margin analysis; asset turnover, credit rations, long-term solvency; and growth over prior year.

Harley-Davidson, Inc.

Ratio Data TTM as of: 09-30-2007)

PROFITABILITY

Return on Assets

Industry Comparison

Return on Equity

Industry Comparison

Return on Capital

Industry Comparison

MARGIN ANALYSIS

Gross Margin

Industry Comparison

Levered Free Cash Flow Margin

Industry Comparison

EBITDA Margin

Industry Comparison

SG&a Margin

Industry Comparison

ASSET TURNOVER

Total Assets Turnover

Industry Comparison

1.3x

Accounts Receivables Turnover

Industry Comparison

34.9x

Fixed Assets Turnover

Industry Comparison

6.3x

Not meaningful

Inventory Turnover

Industry Comparison

11.1x

CREDIT RATIOS

Current Ratio

Industry Comparison

2.4x

Quick Ratio

Industry Comparison

1.6x

LONG-TERM SOLVENCY

Total Debt/Equity

Industry Comparison

52.1x

Total Liabilities/Total Assets

Industry Comparison

52.5x

GROWTH OVER PRIOR YEAR

Total Revenue

Industry Comparison

Tangible Book Value

Industry Comparison

EBITDA

Industry Comparison

Gross Profit

Industry Comparison

Receivables

Industry Comparison

Inventory

Industry Comparison

Diluted EPS Before Extra

Industry Comparison

Capital Expenditures

Industry Comparison

Cash From Ops.

Industry Comparison

Levered Free Cash Flow

Industry Comparison

Source: Business Week (http://investing.businessweek.com/businessweek/research/stocks/financials/ratios.asp?symbol=HOG)

Business Week reports that in the past ninety days preceding December 7, 2007 that "Insiders control 0.16% of HOG through the 330.895 shares held and that "this level of ownership is similar to that of many other companies in the Automobiles industry. However, over the last 3 months, insiders have purchased a net 1.46 4K shares in "stark contrast to the 2-year quarterly average where insiders are net sellers and provides some indication that insiders are more bullish about HOG's prospects for the next 6-12 months. The Activity overview for this period of time is shown in the following chart.

Insider's Transactions - Activity Overview

Purchased

Sold

114.2K Shares

0.0 Shares

0.05% of Exec Shares

0.00% of Exec Shares (Business Week:, 2007)

The Harley-Davidson company reported its 2007 third quarter results ending September 30, 2007 and stated that revenue for the third quarter was $1.54 billion compared to $1.64 billion in the year ago quarter, at a 5.8$ decrease with net income for the quarter being stated at $265.0 million as compared to $312.7 million which was a 15.3% percent decrease as compared to the third quarter of 2006. Earnings per share (EPS) were also down by 10.8% as compared to those in the same quarter of 2006. The company's Chief Executive Officer of Harley-Davidson, Inc. stated: "Harley-Davidson's third quarter financial results are disappointing, but no unexpected. In early September, we announced that we would reduce planned motorcycle shipments for the rest of 2007, and our results are consistent with the Company's revised guidance." (2007) the company states that it has expectations to ship somewhere in the range of 328,000 and 332,000 Harley-Davidson motorcycles in 2007 as compared to shipments in 2006 of 349,196 units shipped in 2006. It is also related that a "modest decline in revenue and lower operating margin in 2007" is anticipated. There is a predicted decrease in diluted earnings per share by 4% to 6% to expect for investors in 2008. The Harley-Davidson company predicts "...the U.S. retail motorcycle environment will continue to be challenging. It expects moderate revenue growth, lower operating margin and diluted earnings per share to grow between 4 and 7% compared to 2007." (Harley-Davidson, Inc. 2007)

Harley's Jim Ziemer further relates in this publication that for the long-term he is "optimistic and confident about our future...Harley-Davidson has a strong business model and we will continue to manage the Company in a manner that strengthens our brand and contributes to lasting success for all our stakeholders." (Harley-Davidson, Inc. 2007)

SUMMARY and CONCLUSION

Harley-Davidson, Inc. has an extremely strong brand and has been in business for many years. While over-stocking the dealer lots has led to decreases in prices in the short-term, it is not likely that the Harley-Davidson company will experience great decreases in earnings per share in the next year and as predicted by the company itself, those decreases are small indeed at 4% to 6%. Because Harley-Davidson, Inc. stock is a traditionally and historically very stable investment, it is likely that this stock investment will continue to be stable in the long-term future and investors are not advised to sell this stock but simply to 'hold' in the interim over the next year as Harley-Davidson, Inc. settles all of its restructuring and pulls the stock values of its company back up to par for the company. Harley's Davidson, Inc.'s ability to meet its stated targets and expectations will depend upon several factors including the company's ability to:

Continue to realize production efficiencies at its production facilities and manage operating costs including materials, labor and overhead;

Manage production capacity and production changes;

Manage supply chain issues;

Provide products, services and experiences that are successful in the marketplace;

Develop and implement sales and marketing plans that retain existing retail customers and attract new customer in an increasingly competitive marketplace;

Sell all of its motorcycles and related products and services to its independent dealers and distributors,

Continue to develop the capabilities of its distributor and dealer network,

Manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations,

Adjust to fluctuations in foreign currency exchange rates, interest rates, commodity prices and credit availability,

Manage regional and worldwide demographic trends and economic and political conditions, including healthcare inflation, pension reform and tax changes,

Anticipate consumer confidence in the economy,

Manage the credit quality and recovery rates of HDFS's loan portfolio, (xiii) retain and attract talented employees,

Detect any issues with our motorcycles or manufacturing processes to avoid delays in new model launches, recall campaigns, increased warranty costs or litigation and Implement and manage enterprise-wide information technology solutions and secure data contained in those systems. In addition, the Company could experience delays or disruptions in its operations as a result of work stoppages, strikes, natural causes, terrorism or other factors. Other factors are described in risk factors that the Company has disclosed in documents previously filed with the Securities and Exchange Commission. The Company's ability to sell all of its motorcycles and related products and services also depends on the ability of the Company's independent dealer network to sell them to retail customers. The Company depends on the capability of its independent dealers and distributors to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the Company. In addition, the Company's independent dealers and distributors may experience difficulties in selling Harley-Davidson motorcycles and related products and services as a result of weather, economic conditions or other factors. (Harley-Davidson, Inc., 2007)