Transcript Harley-Davidson, Inc. (HOG)

Harley-Davidson, Inc.
(HOG)
Buy Pitch
LIAM GARRITY-ROKOUS
October 6, 2014
Agenda
 Key Facts
 Investment Thesis Overview
 Investment Thesis Supporting Evidence
 Risks
 Questions
HOG Overview
 History
 Founded in 1903 by William S. Harley and Arthur Davidson
 Incorporated in 1981; headquartered in Milwaukee, Wisconsin
 Went public in 1986 on AMEX; listed on NYSE in 1987 on November 05, 1987
 HOG (+12,677.54%) vs. S&P 500 (+673.30%)
 Sector: Consumer Cyclical
 Sources of Revenue
 Heavyweight motorcycles (601 cc+) (86% of total U.S. motorcycle market in 2013)
 Also sells parts and accessories; provides wholesale and retail sales financing; earns
licensing fees; operates museum
 Competitors
 Public: Honda Motor Co. Ltd. (NYSE: HMC), Kawasaki Heavy Industries Ltd. (OTC:
KWHIY), Yamaha Motor Co., Ltd. (OTC: YAMHF), Polaris Industries Inc. (NYSE: PII),
Bayerische Motoren Werke AG ADR (OTCPK: BAMXY)
 Private: Ducati Motor Holding SpA and Triumph Motorcycles Ltd.
Key Facts
 Ticker Symbol: HOG
 Share Price: $59.39 (as of 10/03/14)
 Market Capitalization: $12.9 billion
 52-Week Range: $57.48 - $74.13
 Dividend Yield: 1.85%
 P/E: 15.23
 Forward P/E: 13.3
 Beta: 1.05
Agenda
 Key Facts
 Investment Thesis Overview
 Investment Thesis Supporting Evidence
 Risks
 Questions
Investment Thesis
1. HOG dominates the motorcycle industry; its 50%+ market share
increased steadily over past five years and is near all-time high
2. HOG leveraged Great Recession through major restructuring that is
significantly increasing productivity and reducing costs; HOG
continues returning significant amounts of money to shareholders
3. Economic recovery and improving consumer confidence will lift
HOG going forward, both in U.S. and in foreign markets
4. HOG is currently trading at a discount to its historical average
valuation multiples, providing significant upside for long term investors
Agenda
 Key Facts
 Investment Thesis Overview
 Investment Thesis Supporting Evidence
 Risks
 Questions
HOG Dominates Industry
Why is HOG so strong, and will that strength continue?
BRAND LOYALTY
 Established and distinctive
 Attempting to trademark its motorcycle engines’ distinctive sound
 Built “cool” brand through advertising and model names
 “The road starts here” and “Road King®”
 A lifestyle not a machine
 Fanatic customer base
 Tattoos
 Over 700,000 motorcyclists in Harley riding groups
 Earns customer loyalty through excellent service
HOG’s Market Share
Brand strength drives market dominance
U.S. Motorcycle Market
<5%
<10%
Harley-Davidson
Polaris
9-11%
Honda
52%
9-11%
Kawasaki
Yamaha
BMW
9-11%
Other
Market Size: $6.9 billion
3-5%
(estimated by Robin Farley of UBS Securities)
HOG’s Market Strength Supports
Consistent Pricing Growth
Brand loyalty drives ability to maintain pricing growth –
even in recession!
Pricing Power
HOG achieves 2-3% pricing growth yearly, on top of volume growth
HOG Dominates in Key
Industry Demographics
Young customers build long-term growth
Data Source: Harley-Davidson Website (Investor Relations)
HOG Excels in Retail
Holding dealer numbers steady….
(except international, which is growing)
… While increasing revenues per store
Average revenue per store growth of
8.18% a year over last 3 years
HOG Leveraged Great Recession
A history of overcoming challenges:
 One of two US motorcycle manufacturers to survive
Great Depression (1927-1930’s)
 Fended off competition from foreign motorcycle
makers (notably Japanese) (1960’s)
 Avoided bankruptcy (1970s)
 HOG emerged from financial crisis of 2008-09 with
improved productivity
 Target for analysts
HOG Leveraged Great Recession
Restructured to improve productivity:
 2009: new CEO (Keith Wandell) and new management team
 2009-13: spent ~$479 million on major restructuring program
 Refocused on core products
 Overhauled manufacturing and product development
 Included beneficial renegotiation of union contracts
 implemented new enterprise resource planning (ERP) system
 Cut product development time in half
 Results:
 $310 million in savings (2013) and $320 million annually beginning in 2014
 2013: 39% of savings attributed to operating expense and 61% attributed to cost of sales (COGS)
 2014 (estimated): 37% of savings attributed to operating expense and 63% attributed to cost of sales (COGS)
 Fixed costs expected to decline from 20-25% of variable costs to 15-20% in 2014
 Huge improvement in margins
HOG Leveraged Great Recession
Still returning money to shareholders
 Very high level of dividend predictability: paid dividends every
quarter since 1993 (including 2008-09)
 Recently increased dividend 30.95% to $0.275/share: approaching
level ($0.33/share) before financial crisis. Dividend has room to grow
 HOG ranks #8 out of 25 in Bloomberg’s “Dividend Tip Sheet” (ranks stocks
based on how fast payout ratios are growing)
 Current payout ratio (ttm) is 25%, with room to increase.
 HOG likely to achieve (and maintain) payout ratio of ~35%, close to its average payout
ratio for past 10 years (36.51%).
 Recently authorized share repurchase program: able to repurchase
26.6 million shares (as of 6/30/14). Based on closing price on October
3rd, that will be a $1,579 million buy back, equal to 12.25% of the
company
Economic Recovery Will Lift HOG
Improvement follows improved consumer
confidence
Unemployment finally below 6%...
… Yet wage growth stuck at near 2%...
HOG benefits from job
creation in construction field
Spending improving…
… But luxury goods depend on
increasing wages
Economic Recovery Will Lift HOG
Motorcycle industry only now recovering
Industry’s sales recover slowly…
HOG’s sales prove resistant…
Economic Recovery Will Lift HOG
Excellent long-term growth prospects
 Market Share and Demographics
 Beginning in 2011, HOG began making a concerted effort to appeal to a younger
demographic
 Cheaper motorcycles
 500cc; 750cc; Dark Custom collection ($6,799 - $7,499) and ($8,399)
 Different style of motorcycles
 “Project LiveWire”
 Expansion Into Foreign Markets
 Company focus over last five years: HOG added 125 new international dealers since
2009, significantly boosting sales.
 As of FY 2013, HOG has #2 market share position in Europe (601cc+), and is market
leader in Brazil, Japan, and Australia.
 Year-to-date retail sales in Asia Pacific Region grew by impressive 10.1%.
 HOG now sells motorcycles in 89 countries; year-to-date international sales up 4.2%
 Excluding Canada = 7.07% growth (y/y)
Comparable Companies
Comparisons are limited, but HOG outshines competitors
 HOG specializes in motorcycles; motorcycle sales account for
relatively small portion of its direct competitors’ total revenues
 BMW (Bayerische Motoren Werke AG ADR)
 2.18% of total revenues in Q2 2014 from motorcycles
 Motorcycles’ percentage of total sales varies from 1.63% to 2.15% over past 3 years
 Polaris Industries (PII)
 6% of Polaris’ total sales for FY 2013 in motorcycles (Victory and Indian brands)
 Off-road vehicles = 67% of FY 2013 sales
 Snowmobiles = 8% of FY 2013 sales
 Small vehicles = 3% of FY 2013 sales
 PG & A = 16% of FY 2013 sales
Comparable Companies
Comparisons are limited, but HOG outshines competitors
Harley Davidson, Inc.
(NYSE: HOG)
Polaris Industries, Inc.
(NYSE: PII)
Bayerische Motoren Werke
(Frankfurt: BMW)
Daimler
(Frankfurt: DAI)
Share Price
(as of 10/03/14)
$59.39
$145.60
€83.62
€59.49
Market Cap
(as of 10/03/14)
$12.9B
$10.0B
€50.3B
€63.7B
Gross Margin (ttm)
40.6%
29.7%
20.8%
22.0%
21.3%
15.5%
10.5%
7.2%
Net Margin (ttm)
13.7%
9.8%
7.0%
5.4%
Revenue Growth
(3 year average)
6.7%
23.8%
7.9%
-
Net Income Growth
(3 year average)
71.1%
36.9%
18.0%
15.0%
EPS Growth
(3 year average)
FY 2013 FCF Growth (y/y)
74.3%
35.7%
18.2%
14.4%
25.7%
-23.0%
FCF Yield (ttm)
7.31%
2.59%
-
-
Current Ratio
(FY 2013)
1.59
1.16
1.04
1.19
Quick Ratio
(FY 2013)
1.28
0.39
0.31
0.85
Debt/Equity Ratio
(FY 2013)
1.14
0.53
1.09
1.03
Dividend Yield
(as of 10/03/14)
1.85%
1.24%
2.30%
3.72%
Operating Margin (ttm)
HOG outpaces
competitors on key
metrics
HOG’s Valuation Strong
HOG trading at discount to historic multiples
 HOG’s Ev/EBITDA, P/E, and P/FCF multiples (excluding HOG’s P/B
and P/S multiples due to changes in operational performance
metrics) show that HOG is approximately 20-30% “undervalued”
Price Target = $73/share (+22.92%)
Timing Entry
Excellent earnings track record supports entry now
Next Earnings Report:
October 21, 2014
Timing Entry
Now is opportune time to buy
 HOG’s performance strong in 1H 2014
 Revenue +10.73% (y/y) and EPS +28.18% (y/y)
 Q2 2014: EPS of $1.62 (+33.88% Y/Y) significantly beat analysts’ estimates by $0.16;
revenue of $1.84B (+12.9% Y/Y) in line with estimates
 Q2 2014 earnings report:
 Lowered guidance on motorcycle shipments in 2014 from 279,000 - 284,000 (+7.1 to
9.0% Y/Y) to 270,000 - 275,000 (+3.7 to 5.6% Y/Y)
 Weaker sales attributed to weather, constraints on consumer spending, and delays
 Outlook for rest of 2014
 Improving economy
 Incremental sales from Street motorcycles, return of Road Glide
 Huge new model launch
 Removal of bottlenecks in supply
Timing Entry
HOG historically outperforms the S&P 500 during Q4 and Q1
Timing Entry
HOG Is Ready To Bounce Off Long-term Support
Agenda
 Key Facts
 Investment Thesis Overview
 Investment Thesis Supporting Evidence
 Risks
 Questions
Risks
 Risks Due To Potential Weakness In Retail Network
 HOG dependent on independent dealers to manage retail distribution
 Counter: dealer network continues to drive sales dependably
 Risks Due To Lagging Economic Improvement
 Demand dependent on continuing economic improvement
 Counter: Harley-Davidson motorcycles, unlike other luxury products, has the
benefit of being considered a lifestyle product; HOG’s sales have been
relatively resistant to poor economic conditions
 Risks Due To Failure To Differentiate Products
 Future success depends on continued ability to develop innovative products
 Counter: HOG has consistent track record of innovation, and is enticing
younger consumers
 Risks Due To Recalls
 Recalls hurt HOG’s stock price
 Counter: Short-lived, one-time costs
Agenda
 Key Facts
 Investment Thesis Overview
 Investment Thesis Supporting Evidence
 Risks
 Questions
Appendix Images
Is HOG’s Revenue Recognition Policy A Risk?
“Only Harley-Davidson motorcycles are included in the HarleyDavidson Motorcycle Retail Sales data.” (From 10-K filing)
Appendix Images
How Big Is the Risk Of A Motorcycle Recall?