Archive: Harley Davidson (HOG)

HOG: Why I’m Not High on HOG

My latest column is up at RealMoney. Although it is cheap, I don’t think Harley Davidson (HOG) is cheap enough. In summary:

It would be one thing if earnings were growing 12% per year, as they have for the last five years. In that case, investors could expect 15% annual returns. But I don’t think the growth will be even close to that rate, or to the 11% consensus growth estimate.

If the company does manage to earn $3.94 in 2009, it will have finally regained the levels it earned in 2006, and would then have a five-year earnings compound annual growth rate (CAGR) of 5.5%. I think that is a more reasonable growth estimate to use, and plugging that in implies a decent but not great expected return of 8.5%. If I hope to earn double-digit returns, I’d expect a share price no higher than $29 per share next year, or about $26 a share today.

Taking a free cash flow approach to valuation, Harley generated $556 million in free cash flow in 2007, for a 6.2% yield against the current market cap. That’s a nice yield, but I’ve seen quite a few names with similar or higher yields and more attractive growth prospects. In order to generate a double-digit free cash flow yield, the price would have to drop to $23 a share.

Disclosure: William Trent has no financial position in Harley Davidson (HOG)

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