HOGging The Global Limelight: Harley-Davidson, Inc. (HOG)

Earnings Analysis: Harley-Davidson Inc. (NYSE:HOG)Harley-Davidson, Inc. (NYSE:HOG) is really ramping up this year and why not? In honor of its 110th anniversary it’s rocking and rolling globally with special events from Milwaukee to Malaysia. The theme is Freedom and in a nod to Olympic tradition a single black leather jacket, The Freedom Jacket, emblazoned with Harley-Davidson insignia is being passed from rider to rider all over the world.

The story of how the jacket got its name is that Chief Marketing Officer, Mark-Hans Richer, was wearing the jacket while riding in China and stopped off at the highest place on Road 109 at 16,500 feet above sea level. There it’s customary to paint a symbol to mark reaching the destination. Richer asked a Chinese man to paint something on his jacket; what Harley-Davidson meant to him. The man painted the Chinese characters for Freedom in big red strokes on the jacket. Thus a PR campaign is born. Mad Man Don Draper would be proud.

What does all this mean for HOG shareholders and possible investors? A global spotlight will be shining on this iconic brand of American motorcycles and accessories as the riders wearing the Freedom Jacket and other global events commemorating 110 years hit the media. The stock hit yet another 52 week high on March 8 closing at $54.82 but just barely outperforming the S&P 500 over the last year up only 13.95%. It’s trading at a 20.15 P/E with a 1.60% yield and a PEG of 1.04. Harley-Davidson’s global expansion is exactly why investors should use this spotlight to peer more closely.

From Milwaukee to Market Share Globally

Just this last week Harley-Davidson, Inc. (NYSE:HOG) opened its first dealership in the Philippines. This is just part of its plan for global domination (shades of Pinky and the Brain!) with the company almost two thirds of the way toward accomplishing its 2009 goal of adding 150 dealerships overseas. Harley-Davidson, Inc. (NYSE:HOG) now has 1,400 dealerships outside the US although the majority of sales are American.

The company just announced it would be assembling three of its most popular styles in India: the Heritage Softail Classic and the two Fat Boy models. The benefits are twofold: the rides will cost less for the Indian market, averaging over $27,000 US, and will bypass the country’s 75% import tax for motorcycles of Harley-Davidson, Inc. (NYSE:HOG)’s size.

Harley-Davidson, Inc. (NYSE:HOG) is obviously making an enormous commitment to emerging markets with a product that is decidedly discretionary for consumers in these countries. However, a friend formerly with the State Department mused that Harleys should do very well in the Philippines and other Asian countries where cars are the exception and the culture is accepting of such a sign of conspicuous consumption.

The 30 year old Harley Owners Group has over a million members worldwide as the company reaches out to women, Asians, Latinos, and virtually every group outside of its customer base, Caucasian American men over 35 with incomes over $85,000. For more about Harley-Davidson’s campaign of inclusion and community, click here.

The company reported full year 2012 and Q4 results on January 29 and the uptick in Latin American retail sales was staggering, up 39.2% while globally (excluding US) it was a much more modest 6.3%. Emerging markets were down slightly but the move into India and the Philippines should help full year 2013 sales numbers for emerging markets.

What About Those Numbers?

For the full year margins expanded and EPS grew 16% from $2.33 to $2.72. The company also showed confidence in guiding higher with an expected 10% plus surge in shipping motorcycles in the first quarter of 2013 alone. Also the company announced it had bought back 6.5 million shares. Harley-Davidson, Inc. (NYSE:HOG) has been increasing the dividend, most recently with a 35% increase. At a 23% payout ratio it’s certainly sustainable. Corporate governance risks are low. Return on equity stands at 25.07% and the operating margin is 18.43%.

The main risks as stated in their last 10-K are employee benefits and pension payouts however the company was able to make a voluntary contribution to the pension fund of $175 million in 2012. Also at issue is total debt of $5.10 billion to $863.35 million in total cash. The company is working on this paying down over $600 million in debt in 2012.

Competition primarily consists of privately held Triumph, Viper Networks, Inc. (PINK:VPER), and Ultra Motorcycle companies. In many ways Harley-Davidson, Inc. (NYSE:HOG) most closely competes with Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM), both manufacturers of autos, another consumer discretionary sector.

GM is trading at a 9.60 P/E and at a market cap of $38.26 billion is triple the size of Harley-Davidson. Analysts expect a 16.28 % five year EPS growth rate (yoy) for GM and 15.53% for Harley-Davidson.

Ford is trading at a 9.12 P/E with a 3.20% yield and more than four times bigger than Harley-Davidson. At first glance one would think why not buy Ford instead? In one word, growth. Analysts predict only an 11% five year EPS growth rate for Ford. Ford and GM are both turnaround stories and so is Harley-Davidson but with a more extraordinary story in my opinion. Harley-Davidson averted liquidation in 1981 after 13 Harley executives bought the company back from AMF and then faced and overcame strong Japanese competition. Talk about insider conviction.

Riding Off Into The Sunset

Due to its strong brand loyalty and its efforts to claim new members to the Harley Owners Group and converts to the Harley lifestyle I think Harley-Davidson is a good name to buy on a pullback. Valuation is high with Goldman Sachs cutting the price target not on potential but on price as this has been a hot name over the last few years. But I think with these worldwide initiatives including the poignant Freedom jacket campaign Harley-Davidson can ride off into the global sunset without any worries.

The article HOGging The Global Limelight originally appeared on Fool.com and is written by AnnaLisa Kraft.

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