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Schedule 1

FIN 286 - Summer/Fall 2013

Valuation of Harley Davidson as of ~ July 1, 2013
INPUT BOX

Discount Rate (WACC)

10.0%

Near-term sales growth 2014

-5.0%

Near-term sales growth 2015

-5.0%

Terminal Sales & Cash Flow growth

4.0% 2.5% inflation + 1% pop growth = 3.5%; but good growth in growing markets and VERY strong brand

Near-term EBIT margin 2014

18.0%

Near-term EBIT margin 2015

18.0%

EBIT margin - Terminal
est. Value of HOG Equity at 7/2/2013

22.0%

$

12,620,855

# shares outstanding at 7/1/2012

HOG equity value per share

224,139 thousand ( Q213 income statement and Tearsheet at 8/2/2013 )

$

56.31

vs

market price

$

55.54 @ July 1, 2013

3 full years historical
2010
2011

$

60.66 @ Sept 3
Full Year
6 mos. (proj) act. + proj.

6 mos (actual)

2012

6/30/2013

12/31/2013

2013

2014

4,942,582

3,045,714

2,490,098

5,535,812

5,259,021

Projection Period
2015

Terminal

Net Operating Revenues (Sales)
Motorcycles & Related Products

4,176,627

4,662,264

Growth

11.6%

6.0%

12.0%

-5.0%

4,996,070

5,195,913

-5.0%

4.0%

Costs and Expenses
Motorcycle COGS
% of sales

2,749,224
66%

3,106,288
67%

3,222,394
65%

1,924,402
63%

Gross Motorcycle Profit

1,427,403

1,555,976

1,720,188

1,121,312

% of sales

34%

Selling, Admin and Engineering Expense

1,020,371

% of motorcycle sales

33%
926,832

24%

Motorcycle Operating Income (EBIT)

407,032

EBIT Margin %

35%

35.75% took 2013 gross margin from mgt guidance

485,033

16%

970,066

19%

629,144

742,406

636,279

405,177

13.5%

15.0%

20.9%

16.3%

9.7%

1,979,053

35.75%

485,033

20%

3,556,759
64%

890,210

37%

977,782

20%

1,599,888

18%
1,008,987

18.2%

Average EBIT % of Sales for last 4 years

946,624

899,293

18.0%

18.0%

1,143,101

22.0%

36,444

36,444

36,444

14.1%

Investment Income
Interest Expense (don't include in unlevered CFs)
Income Before Taxes - unlevered (EBT)

5,442

132,963

7,369

4,164

4,164

8,328

90,357

45,266

46,033

23,090

23,090

46,180

412,474

762,107

749,775

640,443

409,341

1,017,315

983,067

935,736

1,179,544

142,451

354,025

342,107

325,636

410,481

Taxes (@ 34.8%; firm projection at Q213 news release)

34.8%

Unlevered Net IncomeFinall

412,474

762,107

749,775

640,443

34.8%

266,890

34.8%

663,289

640,960

34.8%

34.8%

610,100

769,063

Full Year
3 full years historical
2010
2011

6 mos. (proj) act. + proj.

6 mos (actual)

Projection Period
2015

2012

7/1/2012

12/31/2012

2013

2014

Terminal

266,890

663,289

640,960

610,100

769,063

442,865
8%

420,722
8%

399,686
8%

415,673
8%

81,329

(22,143)

(21,036)

15,987

248,393

174,862

166,119

187,053

Free Cash Flow Adjustments
START

Unlevered Net IncomeFinall

412,474

762,107

749,775

640,443

NWC = AR + INV - AP
NWC as % of sales projection

363,482
8.7%

381,332
8.2%

402,539
8.1%

361,536
5.9%

8%

NWC
IncrementalProjected NWC Cash Flow

Add:Depreciation

-

(in Note 20 biz segs)

248,246

near-term: depreciation as % of capex

95%

long-term: depreciation as % of capex

90%

168,659 ?

97%

124,196
95%

93%

% of sales (proj 4% near and 4% terminal)

179,988

4.0%

180,416

3.9%

69,267

3.7%

130,733

200,000

2.3%

184,066

3.6%

Guidance on CapEx at Q2 presentation deck #24
Nominal Free Cash Flows

95%

95%
90%

167,730

Less: Capex (also Note 20 - p.99)

173,959

148%

3.5%

174,862

207,837

3.5%

4%

200,000
492,990

756,078

738,018

$

260,354 $

630,353 $

653,900 $

622,393 $

732,292
6/30/2016

Nominal Terminal Value [= Terminal Nominal Free Cash Flow / (r - g)]

12,204,863
Assumed cash flow date : mid-year convention
Periods
Discount Factors (calculated using mid-year convention)
Discounted Free Cash Flows

$

Enterprise Value @ 7/1/2012 (=sum of discounted free cash flows)
net debt

10/1/2013

6/30/2014

6/30/2015

0.25

1.0

2.0

2.0

0.976

0.909

0.826

0.826

594,454 $

514,374 $

254,223

Add: Book value of cash & cash equivalents at 7/1/2012 (I used moto only, p 103 12/31/12)

863,350

Less: BV of Debt = Short-term debt + LT debt, @ 7/1/2012 (again, I used moto only from 10K p 103)

303,000

Less: BV of Pension Obligations = Pension and retirement healthcare and other LT liab @ 7/1/2012

330,294

Plus: BV of HDFS (book shareholder's equity in HDFS @12/31/12 from 10K, p. 103)

full year sales (from the K)

10,086,664
88%

941,083 $

4.20 /share

12,620,855

Harley Equity Value (Enterprise Value plus cash less book value of debt)

Estimation of seasonality

$

11,449,716

6/30/2015

2011

%

$ 4,662,264

2012
$

4,942,582

%

avg

1st 6 mos sales (from the Q) $ 2,402,788

51.5%

$

2,842,416

57.5%

55%

last 6 mos sales

48.5%

$

2,100,166

42.5%

45% 2nd 6 mos

$ 2,259,476

projected 2013

Page 1

1st 6 mos sales (from the Q)

3,045,714 I knew this

2nd 6 mos sales (est using 2012)

2,490,098

estimated full year 2013 sales

5,535,812

45% used GoalSeek to match average

file:///var/www/apps/conversion/tmp/scratch_3/261696747.xlsx

THIS IS THE ROW INPUT CELL to "activate" the data table - 1. this cell equal to the first row input cell in the 2x2. so that the row input values will get run through the valuation spreadsheet.31 -5% -2. The valuation sheet links to this page for inputs. hit OK . The valuation spreadsheet at the front of this book is then linked to this cell. near-term 2014 & 2015 growth rate (g) [terminal g = 4%] $ 56. The discount rate cell in the driver box at the top of the first page is linked to this cell on this 2X2 data table page (the discount rate cell on page 1 has this cell's address). which is cell address D8. in top menu. which is C9. identify row input cell and column input cell 5. select Data > What-If > Data Table 4.2X2 Data Table 2X2 Data Table for GH Harley Valuation .Fall 2013 Discount Rate (WACC) 10.0% this cell set equal to the first column input cell address. first delete the entries in the data table (the black numbers under and to the right of the blue numbers) 2.0% Near-term sales growth 2009-2013 -5.5% 0% 5% 10% 10% discount rate 12% 14% 16% This is the OUTPUT CELL. the value -5%. select a rectangle with the output cell (stock price) at the top left and with bottom-right entry in the data table as the bottom right corner of the rectangle 3. which is the stock price of Harley as calculated on the valuation sheet with these different input combinations. THIS IS THE COLUMN INPUT CELL. so the near-term sales growth cell in the driver box is linked to this cell (has this cell's address in it).

176.99 933.4% 27.80 629.627 -2.Schedule 2 Motorcycle and related SALES Operating Income (EBIT) yoy % change Operating Margin ~ EBIT margin year 2005 5.3% 13.0% 10.214 1.987 2013 ann.0% 20.962 2005 27.0% 9.6% as % of 2006 1.74 400.3% 2008 5.686 8.6% 0. home equity loans ended by mid-2007 with decline in house prices 16.0% 27.235 2008 12.5% 25.0% 16.6% 0.2% . 18.414 -2.535.726.1% 0.597.72 407.342.144 2011 13.5% 2007 5.85 742. Est.96 684.800.0% 0.6% Operating Margin_x000d_~ EBIT margin 30.0% 0.6% 0.95 1.130 -23.3% 2009 4. Est.0% 0. 5.5% 15.4% 2006 5.3% 9.5% 2012 4.464.7% 18.812 12.287.0% 5.008.3% 12.662.2% 2006-2007 a lot of buyers used home equity loans to buy Harleys.578.264 11.582 6.3% 0.942.0% 15.848 -1.7% 2011 4.153 2006 27.000 2009 9.843 2007 16.3% 2010 4.032 2010 9.0% 2013 ann.406 2012 15.

346 255.482 381.382 219.079 253.627 4.539 361.9% average 7.942.662.2% looks like the flex-manufacturing is working.446 418.819 + Inventory 326.524 307.536 motorcycle sales 4.AP 225.332 402.7% 8.Schedule 3 Simple Working Capital calculations for Motorcycle Only 3 full years historical & 6 mos actual 2010 2011 2012 6/30/2013 AR 262.428 8.7% % of moto sales 8.717 200.176.039 230.000 .713 221.091.1% 5.264 4. and the number is trending down .582 6.006 393.064 = simple NWC 363.

40% 3.18 2.0% (c) 9.4% 16.40% 3.23 using monthly returns 2007-2012 (a) Source: US Treasury website.84% 18.72% HML Premium 4.gov/ @ 8/2/2013.39% (b) Beta from Yahoo! Finance and Ibbotson (c) Source for MRP%: academic studies and my own opinion and more recent data (d) Cost of Equity = Risk Free Rate + Beta*(Expected Risk Premium) Cost of Equity using FF-3factor model Fama-French Cost of Equity FF Cost of Equity Risk Free Rate = = 3.8% (d) Risk Free Rate Cost of Equity by CAPM (A) CAPM with Yahoo! Finance beta (B) CAPM with Ibbotson beta (C) Berk & DeMarzo text Table 10.8% Risk-free + FF-Beta X MRP + SMB prem + HML Prem . 20-year rate 3.40% FF-Beta 1.23 (b) Market Risk Premium 5.0% SMB Premium 3.40% (a) Beta 1.treasury.00 2. 20 year Treasury rate /www.36 MRP 5.Schedule 4 Cost of Equity using CAPM Calculation of Cost of Equity for Harley Davidson WACC Inputs: (A) (B) (C) 3.6 shows Harley equity beta = 2.0% 5.3% 13.0% 6.

Schedule 5 Calculation of Cost of Debt .use bloomberg or notes to financials or you can use one of the credit curves below .

1% .620.Schedule 6 WACC Calculation # shares of equity 224.8% first valuation sheet cost of debt (after-tax) total capital (D+E) 1.31 total amount of equity $ 12.80% cost of debt schedule tax rate 34.139 value of equity per share $ total amount of equity $ cost of equity first valuation sheet 55.8% $ 12.6% % debt (book value) 2.second iteration with first calculated price # shares of equity 224.54 plug at market value TO START 12.680 13.4% blend of CAPM and Fama-French total debt $ 303.855 % equity 97.80% Harley is BBB.139 value of equity per share $ 56.4% CAPM with ibbotson beta total LT debt $ 303.855 cost of equity first valuation sheet calculated price from 1st run 13.3% 13.8% $ 12. no HDFS debt cost of debt (pre-tax) 2.000 motorcycle debt.7% % debt 2.680 % equity (market value) 97.751.923. used curve at 5 years tax rate 34.4% WACC 13.1% WACC Calculation .448.8% first valuation sheet cost of debt (after-tax) total capital (D+E) WACC 1.000 cost of debt schedule cost of debt (pre-tax) 2.