Recently, I wrote about an alternative way to play automakers with Tata Motors, an Indian based maker of affordable cars and trucks. However, for those who are not interested in too much foreign exposure, there are few choices in the sector. Companies like Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) still leave investors with a bad taste in their mouths after the financial trouble they got themselves into a few years ago, and newcomers like Tesla Motors Inc (NASDAQ:TSLA) are still too speculative for long-term investing. I propose that one of the best vehicle makers to invest in is not a car or truck company at all, but Harley-Davidson, Inc. (NYSE:HOG), the largest American motorcycle manufacturer.
About Harley-Davidson
Harley-Davidson, Inc. (NYSE:HOG) is the leading manufacturer of heavyweight motorcycles, and also sells parts, accessories, and clothing. The company manufactures 32 models ranging in price from just over $13,000 to around $53,000, and the models are grouped into five “families” of motorcycles.
The company has a 55.7% market share in new heavyweight motorcycles in the U.S., however their international business has room for improvement. Harley-Davidson, Inc. (NYSE:HOG) has stated that their average U.S. customer is a male over age 35 with a household income of about $85,000.
Growth Ahead?
Harley-Davidson’s market share in the U.S. probably isn’t going to change by that much. Where there is room for growth domestically is if overall motorcycle sales increase as a result of the continuing strengthening of the economy. Harley-Davidson sold over 303,000 motorcycles in their most successful year, 2008.
Once the financial crisis hit, sales dropped sharply. Although they have grown every year recently, 2012’s sales of about 250,000 new motorcycles are still far off from the peak. Motorcycles seem to be extremely dependent on the amount of disposable income in consumers pockets, so as the job market and economy continue to improve, so should motorcycle sales.
Harley-Davidson, Inc. (NYSE:HOG)’s strongest opportunities for growth are in international markets, which currently make up only about a third of the company’s sales. I think Harley-Davidson will begin to focus more of its marketing efforts overseas, although significant growth in Europe will be delayed until their economic troubles are behind them.
Valuation
My only complaint about Harley-Davidson, Inc. (NYSE:HOG) is that it looks a bit expensive at the moment. Even though there is rapid growth projected ahead, I think it is a bit too uncertain to warrant such a high valuation.
Currently, shares trade at 18.6 times TTM earnings, a significant premium to both its peers and its own historical average. The company is projected to earn $3.36 in 2013, and is expected to grow earnings to $3.91 and $4.14 per share in 2014 and 2015, respectively. This translates to a 15.3% average forward growth rate, which is very nice, if they can deliver on it.
Alternatives
As mentioned before, the other ways to play the domestic vehicle sector are Ford Motor Company (NYSE:F) and General Motors, which are more speculative but could definitely pay off huge for shareholders. Of course there are newcomers like Tesla, and even though I love Tesla, I would put it in an entirely different category. Tesla Motors Inc (NASDAQ:TSLA) is a play on clean technology and the mass-marketability of electric vehicles, which I actually think it just proved by announcing that it anticipates turning a profit this year. Although I think Tesla Motors Inc (NASDAQ:TSLA)’s shareholders will do very well in the long run, I would not consider it a pure “automotive sector” play.
General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) are the numbers one and two U.S. car and truck manufacturers, and the major difference between the two as investments is the perceived risk level that is taken on. Out of the two, I think ford is the best value right now, especially when compared to its foreign counterparts. I wrote a full post about Ford Motor Company (NYSE:F) a couple of weeks ago, but to summarize, Ford Motor Company (NYSE:F) trades at just 9.5 times forward earnings with projected forward growth of upwards of 20%. The negatives (as opposed to Harley-Davidson) include higher competition and less financial stability. As mentioned before, Harley-Davidson has a brand loyalty that is tough to beat.
So, Is It Worth A Look?
Harley-Davidson, Inc. (NYSE:HOG) is definitely a great company with an extremely strong brand name, however in my opinion it is still a bit expensive for the risk you take in owning it. I would wait for a pullback to around 17 times earnings (around $46) before considering jumping in, which is right around the historical average.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Ford and Tesla Motors . The Motley Fool owns shares of Ford and Tesla Motors .
