Financial Analysis of Harley-Davidson, Inc.

(HDI) for the Five Years 2001- 2005 Financial Modeling & Corporate Finance


Harley-Davidson.3% for the S&P 500 average. However. Net Income and Revenue have seemed to level off in 2005. and in 2005 reported a 20th consecutive year of record revenues of 5. Inc. Harley-Davidson’s profit ratios are strong with steady increases in both revenue and net income from continuing operations. Mr Ziemer started with the company in 1969 and spent 14 years as its Chief Financial Officer. the company was incorporated. On the positive side. The founders William A. More than 100 years later. the graph below shows the percentage year over year growth in Sales. Harley and Arthur Davidson built their first motorcycle in 1903 in a woodshed turned ‘factory’ in Milwaukee. where he was responsible for Harley-Davidson’s steadily increasing revenues and for orchestrating HDI’s entrance into the financial services industry.Brief Background on Harley-Davidson. Harley-Davidson is ranked number 380th in the Fortune 500. Harley-Davidson is lead by James L. management appears to be controlling costs as indicated by the decline in the growth of COGS.5%. market share of 49. and five years later Harley-Davidson’s dealer network included 200 domestic retailers and exports to Japan. COGS and Net Income and it is clear that the growth rate is slowing. Ziemer.S. Inc. In fact.5% industry average and 8. Harley-Davidson has evolved from a transportation provider to the market-leading manufacturer of recreational cycles. Page 2 of 8 . return on assets and return on equity. the manufacturing and sale of motorcycles.34 Billion USD and a U. (HDI) operates in both. For purposes of this analysis. Wisconsin. More evidence of cost controls will be presented later. and the financing of products to dealers and retail financial services including insurance. By 1907. HDI’s profit margin of 18% in 2005 is more than double that of both. the combined financial statements of both operations will be used in presenting our assessment of HDI’s financial condition and the significant changes that occurred in the years 2001-2005. warranty and private-label credit cards.700 world-wide. Company Performance – Sales and Growth Employing more than 9. Gross Profit. the 6. The company’s steady growth was fueled by innovative design and a reputation for rugged performance. Profit ratios have increased each year in the period studied and trend in line with both.

HDI’s stock appears somewhat under-valued. This business model is unique to Harley-Davidson within this industry with competitors carrying and average of 50% of current assets as inventory. when HDI’s stock price softened reacting to the cancellation of 10.6 and 3. Looking at the entries on the income and balance statement. indicating a potential slowdown for both demand and future revenues. Harley-Davidson maintains a tighter control on inventory levels. reveal a steady increase in these ratios. It is worth noting that in 2005. The 2005 fiscal year closed with a PE ratio of 15. however. HDI common stock sold for 19. This ratio took a hit in 2005.83 times its overall return. accounts receivables increased by a modest amount between 2004 and 2005.000 production units at the end of the 1st Quarter. when compared with the industry average PE ratio of 20.68 in 2005 and a high of 9. with a low of 4. keeping it fairly stable from 2002 – 2005 after spiking in 2001. The Market/Book Value or Price/Book ratio has varied widely in the period studied.08 in 2001. Though the PE ratio of 15.04. Examination of the current ratios and quick ratios. Cash Management and Stockholder Value A comparison of the 2005 Current and Quick ratios of 3. sending a warning that Harley-Davidson may have miscalculated demand forecasts and would not meet projected 2005 revenues. indicates that HDI carries a low percentage of inventory as current assets. finance receivables accounted for over Page 3 of 8 .35 respectively. demonstrating that Harley-Davidson is in a strong liquidity position with both ratios substantially greater than one. in this case approximately 7%. inventories fell during the same period. In 2004.8.Figure 1 Year over Year Percentage Growth Harley-Davidson’s market value ratios are consistent with that of a mature industry competitor.04 would normally indicate a low potential for continued growth. while Book Value per share has been steadily increasing.

averaging 55% per year over the period analyzed.05 Billion of stocks in 2005 and $564 Million in 2004. HDI management will continue to rely upon financing as a stable source of secondary income. In 2005 Harley-Davidson paid a dividend of $. due in part to increases in financing activities. another indication of its strong cash flow position.4% respectively.25% of total assets and while a small percentage.01% in 1999 to 27. The ratio of networking capital to total assets percentage is at 43%. another indication of good liquidity. resulting in an overall increase of 4. The dividends paid out have risen sharply. The Interval measure shows that Harley-Davidson can operate for 347 days with no new cash inflows. this is another positive sign. there was little explanation on the seemingly dramatic shift in the dividend policy. Shareholder profit rose from 23. Although management referenced the increased dividends in the 2004 and 2005 Annual Reports. Common stock valuation has remained stable in part due to the recent re-purchase of $1. Harley-Davidson has held its average payment period to its suppliers close to 30 days over the period.. Figure 2 Receivables vs.64% and a five-year average of 27.65% in 2004. Finally.6 Billion shares and was intended to prevent dilution of stock values. Resulting shareholder profit has increased consistently during the stated period and has outperformed industry and S&P 500 averages of 18. both Inventories and Accounts Receivables declined and stabilized over the period while Net Receivable increased from 2003 to 2005. This is a substantial increase over prior periods which paid and average dividend of roughly $0.4%. but it is still greater than one and therefore at an acceptable level.098 per share.2 in 2005 which has decreased slightly from 2004 and 2003. Page 4 of 8 . Inventory Harley-Davidson had a cash ratio of 1. Management indicated this was in response to 2002 and 2003 exercised options of more than 4.8% and 12. management has introduced a policy to increase cash on hand and pay higher dividends. In recent years. In figure-1 below. Net Receivables constitutes a significant percentage of total assets of the company.63/share.

26 and the S&P 500 is significantly higher at 1.04. Also important is the post retirement health care benefits expense. Upon examination of the common size balance sheet. while total liabilities remained steady at 41. steady liabilities and shareholder equity ratios indicated in the increased sales reports are a result of true growth.24 and is still very reasonable.Financial Leverage – Increasing profit.3 (see figure-2) Figure 3 Leverage Ratios Asset Management. However.6 and 14 times greater than the S&P 500 average of 3. In order to compare to industry data. falling about 32% each. HarleyDavidson appears to be taking on more debt for long term investments.16% of total assets.61% from the prior year. Of potential interest are the Times Interest Earned (TIE) ratios and Cash Coverage ratios. Inventory turnover is on the rise and with a value of 14.11 and 47. other markers including total debt have remained stable. Harley-Davidson is at .1 by 84%. as opposed to re-valuations or other potentially misleading calculations. especially in China and this may be reason for the increase in borrowing. demonstrating management commitment to controlling costs.32 while the industry average is a bit lower at . Page 5 of 8 . There is some evidence of expansion overseas. Turnover – Harley-Davidson makes efficient use of assets in production of motorcycles.39% to 16. these ratios seem to have plummeted to 42. this is still twice the industry average of 21. we used the “Finance Debt Ratio” which is slightly different than the textbook’s long term debt ratio. Based on the steady increase in borrowing (financed debt) from 12% of assets in 2001 to 19% of assets in 2005. While long-term debt has increased slightly over the period. However the long term debt ratio in 2005 is only . Using this measure.49 respectively. In 2005.9 in 2005 bested industry averages of 8. it is notable that current liabilities in 2005 actually fell from 21. which decreased by nearly 60% in 2005 to only 1.3% of total assets.

5. however. Wisconsin in 2003. Total asset turnover of 1. due to Harley-Davidson’s policy of asset-backed securitization.6 or every 5 months The S&P trailed both at 0.6% respectively.59 in 2001.5 in 2005. Days of inventory have decreased consistently from 29. Recent capital expenditures include the expansion of the Harley-Davidson product development center in Milwaukee. This measures the number of dollars of sales generated by a dollar of a firm’s assets.Inventory ratios are decreasing as management increased focus on supplying adequate dealer inventory and more efficient supply chain management.8% and 20. HDI held 8. At year end 2005. and 2.00 at year end 2004 but picking up a little in 2005. Since this time.06 in 2005 is lagging behind the industry average of 1.1% for the S&P 500. The Fixed asset ratios were also fairly consistent while the net working capital ratio. a measurement of return on capital is fluctuating and moving downward in the period from a high point of 3. HDI’s ROA of 18. as mentioned earlier.3 in 2001 to 24. The Total Asset Turnover Ratio stays generally around one.4. freeing up additional capital.6 or every 5 months. Return on Assets. Total asset turnover in 2004 of . this is due in large part to HDI’s policy of selling loans to move them off the balance sheet. A noticeable decrease in days of inventory supports management’s strategy to move inventory to dealers/customers more efficiently eliminating back-orders and poor customer satisfaction feedback. The lag in this number could be as a result of the cancelled order of 10.1% are considerably better than industry averages of 10. to a rate of 2.97 and 1 in 2005 are lagging behind the industry average of 1. Accounts receivables turnover is consistently high. profitability growth has begun to slow by 2005. In looking at 5 year averages. Looking at the trends for Net Profit Margin.000 units in 2005 after a disappointing first quarter report. Harley-Davidson reported total earnings of 959 Million in 2005. Simple ratios using stated HDI accounts receivables are not necessarily an accurate measurement with this company. Return on Equity and Earnings per share shows an upward trend over the period with Net Profit Margin flattening towards the end of the period. HDI trimmed expenditures to compensate for the increased debt obligations and this appears to be working to maintain adequate ratios.3% and ROE of 31. HDI is consistently well ahead of the Industry and S&P 500 in terms of these profitability measures. which moves current accounts receivables off the balance sheet each year. Profitability Measures – Harley-Davidson is unquestionably profitable. which is low compared to the industry’s average turnover of 7.8% and 16.4.34 days of sales in loaned funds and maintained a receivable turnover ratio of 3. Page 6 of 8 .

Figure 4 Profitability trends Market Value Ratios Analysis – Figure-4 shows a summary of the Market value ratios. Figure 5 Market Value Ratio Trend Page 7 of 8 . As can be seen. which indicates the stock is undervalued at this time. Notice the Market Value to Book ratio is declining in concert with the PE. while the book value per share has risen until 2005. The Earnings per Share has risen steadily over this period. the P/E ratio has declined rapidly since 2005 with HDI price below both the industry average and the S&P 500.

1% ROA 18. analysts are able to use this formula to determine operating efficiency.3% Multiplied by Equity Multiplier 1. asset use efficiency and financial leverage.02 0. In the case of Harley-Davidson.1% An expanded DuPont Analysis will uncover more detail about the components of ROE and can be a useful tool in determining future course of action by management to improve profit.DuPont Analysis – By breaking the return on assets and equity into the components of these ratios.97 Sales 5342214 Divided by Total Assets 5255209 Net Income 959604 Divided by Sales 5342214 Total Costs 4382610 Subtracted from Sales 5342214 Fixed Assets 2109972 Plus Current Assets 3145237 CoGS 3301715 Selling & Gen Admin 310845 Depreciation 205705 Interest 36190 Taxes 528155 Net Receivables & Deferred & Prepaid 1763853 + 61285 + 52509 Cash 1046172 Inventory 221418 Figure 6 DuPont Analyses Page 8 of 8 .02 x 1. ROE 31. maximize financial leverage and improve efficiency. the return on equity is stable throughout the period and can be represented by the following formula: ROE= Profit Margin x Total Asset Turnover x Equity Multiplier Calculating Harley-Davidson’s 2005 ROE ROE = 17.70 = 27.96% x 1.96% Multiplied by Total Asset Turnover 1.57 ROE = 31.7 Profit Margin 17.

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