Question

Harley-Davidson Inc. produces motorcycles, motorcycle parts and related accessories and merchandise in the United States and internationally. It is headquartered in Milwaukee, Wisconsin. Use the following information on Harley-Davidson and five other similar companies to value Harley-Davidson as of December 31, 2004.
	Harley-Davidson Inc. 2004 ($ millions)
Net income	$    889.77
Number of common shares, millions	294.31
Earnings before interest and tax	$ 1,506.16
Tax rate	35.0%
Book value of equity	$ 3,218.47
Book value interest-bearing debt	$ 1,295.44
Total Sales	$ 5,320.45
Total Assets	$ 5,483.29
	Harley-	Arctic		Polaris	Marine	Winnebago
	Davidson	Cat	Brunswick	Industries	Products	Industries
			Comparison of Timberland with Comparable Companies:
			Growth Rates, Financial Risks, Size, Returns
5-year growth rate in sales (%)	15.5	6.2	4.1	6.1	15.5	10.8
5-year growth rate in eps (%)	28.1	11.1	47.1	15.9	25.1	17.2
Interest coverage ratio (x)	60.9	*	8.9	85.1	*	*
Total liabilities to assets (%)	0.4	0.3	0.6	0.5	0.2	0.5
Total assets ($ millions)	5,483	286	4,346	793	110	395
			Indicators of Value
Price/earnings (x)		16.9	17.8	27.8	28.6	18.6
MV firm/EBIT(1-tax rate) (x)		17.3	19.4	24.3	29.0	17.6
MV equity/BV equity (x)		2.8	2.8	8.0	7.7	6.5
MV firm/BV firm (x)		2.8	2.3	7.7	7.7	6.5
Price/sales (x)		0.8	0.9	1.6	2.7	1.2
MV firm/sales (x)		0.8	1.1	1.7	2.7	1.2
	* These companies have little or no interest-bearing debt outstanding.
Tasks to complete:
Step 1 - Compute Mean and Median Values for peer-organizations. (Exclude H/D from the computations.
Step 2 - Present and JUSTIFY your estimates using EACH of the following:.
a- Price/earnings
b- MV firm/EBIT(1 - tax rate)
c - MV equity/BV equity
d - MV firm/BV firm
e - Price/sales (x)
f - MV firm/sales (x)
Step 3 - Present your "estimated indicators of value" in a matrix format.
Step 4 - Present the implied value of HOG common stock per share for each indicator of value in matrix format.
Step 5 - Add a Text Box and present an evaluation of your best analysis for a "fair price" for HD Shares.

Answer 1

Here are my estimates. In coming to these estimates, I judged that Harley-Davidson (HOG) exhibits average financial risk relative to its peers, but an above-average five-year growth rate in sales. All of the companies have modest financial leverage, and HOG is representative of the other companies. The company’s above average sales growth suggests to me that its indicator of value for the first two (income-based) ratios should be above the average value for the comparable firms. A figure about 5 percent above the sample average looks about right. I use a slightly lower than average ratio for the market to book ratios for HOG to be conservative, as I feel that HOG may be more capital intensive than its peers. Lastly, HOG's brand name and recognition should result in higher profit margins, thus I choose above average ratios for thesales based ratios.

My best guess of a fair price for Harley-Davidson's shares at year-end 1998 is $67.00. I place more weight on the earnings-related values, as income is more closely related to cash flows than sales or book values. The actual price of HOG on the valuation date is $60.75 per share, so my estimate is about 10 percent high. So is HOG under valued? Well, not according to the market. Shares of HOG fell during 2005, closing at 51.49 per share on Dec.31, 2005. It is important to remember that these values are estimates and only as good as the assumptions behind them.