Is Harley-Davidson Stock A Good Buy For Investors? The Market Says Yes

How do you determine whether or not a stock is a good buy, particularly in the motorcycle segment?

You use metrics to size up a stock’s true value. Here’s how. You base your calculations on current price multiples, the consistency of past earnings and a company’s cash flow and how much growth you can expect from a company, in this case,Harley-Davidson (NYSE: HOG).

Start by taking a look at investors’ favorite metric,the P/E ratio. This figure divides the company’s share price by its earnings per share. The lower this number is, the better the stock looks.

Second, you look at enterprise value to unleveraged free cash flow, and you arrive at this number by dividing a company’s enterprise value or its market cap, plus its debt, minus its cash on hand by its unleveraged free cash flow or the company’s cash flow and add back the interest payments on any debt the company may have. Again, the lower this number is, the better the stock looks to investors.

A good buy generally has low multiples on both of these numbers.

Harley-Davidson sports a P/E ratio of 21.2 and an EV/FCF ratio of 18.4 over the last year. An “ideal company,” if there is such a beast, will be consistently strong in its earnings and cash flow generation, and over the past five years, H-D’s net income margin has ranged from -0.5% to 16%. During that same time frame, unleveraged cash flow margin for H-D has ranged from -17.2% to 22.7%.

We certainly do not feel it is fair when we’ve spent years building a customer service-oriented business to promote the brand worldwide.

-Tom Gianetti, St-Paul Harley-Davidson

Harley’s five-year P/E ratio is less than its one-year ratio, and the fact that the company is in a capital-intensive industry which is very sensitive to overall economic conditions means H-D is a pretty volatile stock. The initial numbers don’t make Harley look like a cheap buy, but the stock’s performance has been solid, so maybe some other factors will swing your decision.

One of those factors might be the strength of the brand overall and it’s relationships with its dealer network.

And it’s here where a problem might arise for the Milwaukee firm.

A Harley-Davidson dealer in St. Paul, Minnesota, sued the company recently in federal court and contends that the manufacturer’s restrictions on international sales by U.S. dealers (and sales through third-party websites) are unfair and weaken individual dealer’s profits.

The suit arose over new restrictions on dealer’s ability to sell motorcycle parts, accessories and clothing.

“These changes would deprive us of literally millions of dollars of annual revenues, thereby jeopardizing our ability to remain in business,” the dealer said.

According to St-Paul Harley-Davidson, they say they earned $8 million a year in revenue from those types of sales from 2008 through 2010, even as overall motorcycle sales declined in 2008 as the recession chopped into the discretionary spending motorcycle dealers depend on to stay healthy. Sales have begun to improve, and Harley-Davidson said last month its third-quarter net income more than doubled from a year earlier.

Harley-Davidson says that’s way off base and has always taken a fiercely protective stance on maintaining its iconic brand by restricting sales of new inventory through third-party websites.

The motorcycle maker caused the ruckus by changing the rules on Aug. 1 of this year saying U.S. dealers may not sell Harley-Davidson parts and accessories to customers outside the United States and added that starting on Jan. 1, 2012, U.S. dealers may not sell new parts or accessories on “third-party” websites either.

St-Paul dealership president, Tom Giannetti, said Harley-Davidson had changed its policies to block sales of products through websites such eBay and Amazon.com.

“These new policies are highly controversial and may be arguable,” Giannetti said. “We certainly do not feel it is fair when we’ve spent years building a customer service-oriented business to promote the brand worldwide.”

The upshot? Even with the recent recall of some 300,000 Harley Davidson bikes by the company, investors don’t seem to see the dealer revolt as anything more than a tempest in a teapot, and shares of Harley-Davidson were up 4.4 percent at $39.30 on the NYSE.

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