Harley-Davidson: Ride The HOG For Great Returns


  • Harley-Davidson's management team are demonstrating their ability to work their growth plan.
  • We are forecasting 16% bottom line growth and the team is exceeding that.
  • A low, but consistently growing, dividend.
  • Management has authorization to buy back 26.8 million shares with no price limit.
The management team at Harley-Davidson (NYSE:HOG) sure know how to deliver to an agreed strategy. Over the past 3 years, this business has worked a plan to: 
  1. return to it's roots, focusing on Touring, Custom and Sportster style motorcycles 
  2. focus on international growth 
  3. gear the business up for high single / low double digit growth 
  4. return cash to shareholders.
Well, they've easily matched my expectations in each one of these areas, as I'll outline below.

Firstly though, our STRIDE ratings for the company are pretty much excellent across the board with our dividend rating being the only real soft spot on the radar - and we know this is improving.

A return to core HOG traditional sales

At the back end of 2010, the management team announced the sale of MV Agusta so it could focus on the core brand and return to the traditional Touring focused model. This was a stroke of genius in hindsight. This sharpening of focus allowed the business to identify several weak areas in the business and control costs in manufacturing. The results? Well, a nearly 400% increase in EBIT with 28% growth at the top line. In reality, the business has operating expenses that are below their 2010 level, with revenues up 28% - a clear demonstration on how the brand is selling and how the management team is running the firm.

The key to this has been the Touring line. Unit sales up 30% and external reviews on the current range are nothing short of glowing. The truth is, this is what we all think about when we think about Harleys (and the iconic image of Arnie riding a Softail off a bridge with a truck chasing him, but that doesn't help my point).

We see that 'Road King' image firmly in our heads (well, I do at least).

Focus on international growth

The international market appears to be shrinking when looking at the 600cc+ market. The European market shrank at 6.2% in the last year while Harley has managed to grow at 18.5% a year since 2010.

This, to me, truly demonstrates the strength of this iconic brand, even internationally.

Gear the business for growth

The management team has been looking at ways to drive bottom line growth and has done a fantastic job at this, implementing:
  1. An online merchandise store which is bringing merchandise sales back to no shrinkage. It looks like, by the end of the year, this will be net positive in growth. While this drives some sales, this is more about brand and I'm happy to see this happening.
  2. Consolidation of manufacturing has been key in keeping costs down and the team has done a fantastic job of controlling this while growing.
  3. Eliminate unnecessary debt burden. The business has paid down $8b of debt in the past four years.
  4. Overall, all these signs demonstrate a business geared for tremendous growth over the coming 3-5 years.

The STRIDE picture ahead


So, we are happy with Harley and are holding it because:

  1. All the fundamentals stack up
  2. Timing is good
  3. Trading cheap as far as we're concerned
  4. We are forecasting double digit growth
  5. They are working a model that gives them significant moat

In conclusion

We find Harley-Davidson to be a compelling large cap growth story. A focused management team with a proven track record of delivery, a great opportunity to grow the brand, a growing dividend yield and, according to our valuation engine, trading on the cheap. So sadle up that HOG and ride it all the way to great returns.

Disclosure: The author is long HOG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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Topics: 3D Value Investing, International Investing, Valuation


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