Investment Report and Analysis Harley-Davidson, Inc Term Paper

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Investment Report and Analysis

harley-davidson, inc.

COMPANY OVERVIEW

Harley-Davidson, Inc. is the parent company to a group of companies doing business as Harley-Davidson Motor Company including Buell Motorcycle Company and Harley-Davidson Financial Services. Harley-Davidson Motor Company is a manufacturer of heavyweight motorcycles along with a complete line of motorcycle parts, apparel, accessories and other general merchandise. Harley-Davidson manufactures five lines of motorcycles. The corporate headquarters of Harley-Davidson are located in Milwaukee, Wisconsin. Harley-Davidson employs approximately 9,000 individuals.

2004-2006 Annual Balance Sheet

Harley-Davidson, Inc.

Annual Balance Sheet

Currency in Millions of U.S. Dollars as of: Dec

Restated Dec

Restated

Dec

Assets Cash and Equivalents

Short-Term Investments

TOTAL CASH and SHORT-TERM INVESTMENTS

Accounts Receivable

TOTAL RECEIVABLES

Inventory

Prepaid Expenses

Finance Division Loans and Leases, Current

Deferred Tax Assets, Current

TOTAL CURRENT ASSETS

Gross Property Plant and Equipment

Accumulated Depreciation

NET PROPERTY PLANT and EQUIPMENT

Goodwill

Finance Division Loans and Leases, Long-Term

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Deferred Tax Assets, Long-Term

Other Long-Term Assets

TOTAL ASSETS

LIABILITIES & EQUITY Accounts Payable

Accrued Expenses

Current Income Taxes Payable

Other Current Liabilities, Total

TOTAL CURRENT LIABILITIES

Finance Division Debt, Non-Current

Pension & Other Post-Retirement Benefits

Deferred Tax Liability Non-Current

Other Non-Current Liabilities

Term Paper on Investment Report and Analysis Harley-Davidson, Inc. Company Assignment

TOTAL LIABILITIES

Common Stock

Additional Paid in Capital

Retained Earnings

Treasury Stock

Comprehensive Income and Other

TOTAL COMMON EQUITY

TOTAL EQUITY

TOTAL LIABILITIES and EQUITY

There are some interesting changes noted in the statement of variation for Harley-Davidson in 2005 when compared to 2004 in that there were three factors, which led to an increase in the net income of Harley-Davidson including; (1) an increase in net revenue; (2) an increase in financial services income; and (3) decrease in other expenditures. The largest increase was the percentage change in financial services income at 8.63% while the net revenue increase was at 6.52% and other expenditures dropped by 1.12% in 2005. The total amount of increase in net income for 2005 is the total of $353,457,000.00. This increase was offset by increased expenditures incurred supporting the increase of net revenue. Investments actually dropped by 1.32$ in 2005 due to negative affects of the increase in cost of goods sold, the increase in financial services expense, increases in selling, administrative and engineering expenses, an increase in provision for income taxes, and finally a decrease in investments income. The largest increase was in the financial services expenses, which rose by 20%. Investment income was the lowest contributing component in the decrease which fell by 1.32% and the cost of goods sold rose by 5.97% while increase in selling administrative and engineering expense rose by approximately 4.88% with the increase in income tax provision rose by 7.85%.

Gross profit for 2005 is stated at $2,040,499,000 which is up by 7.5% from 2004. The net income rose by 8% to $959,604,000 for 2005. In April 2005, Harley-Davidson shares posted the biggest drop in more than ten years at approximately $3 billion from their stock market value. In 2005, 33.5% of shipments were higher priced touring models. Segment reporting is used by Harley-Davidson for reporting in business and foreign operations. Harley-Davidson operates in two business segments and specifically the Motorcycle and Financial segments. These two are managed separately due to the fundamental differences in operations. Geographically Harley-Davidson is divided into five segments:

1) United States;

2) Europe;

3) Japan;

4) Canada; and 5) Other.

The following chart illustrates the net revenues for motorcycles by geographical segments.

Harley-Davidson - Retail Revenues (by Segment)

Review of forecasts for Harley-Davidson at year-end 2005 shows that U.S. motorcycle sales experienced an 11% rise in the first six months of 2005 and that Harley-Davidson's share of the motorcycle market were at 23.7% behind Honda's 27.4%. The 2007 models were positively received with Harley-Davidson buying back 9.9 million shares in the first two quarters of 2006 at a cost of $499.5 million. In July 17, Harley-Davidson was authorized for repurchase of 10 million more shares and this positively affects Harley-Davidson, Inc. In that investors and companies alike are positively charged toward stock buybacks and that this boosts per-share earnings as well as easing stock-options awards.

Reuter's News Stock Quote for Harley-Davidson, Inc. HOG (NYSE) for December 30, 2007 includes the following:

47.15USD

Price http://stocks.us.reuters.com/lib/img/arrowNeg.gif

Percent http://stocks.us.reuters.com/lib/img/arrowNeg.gif

Previous Close $47.18

Open $47.01

Day High $47.95

Day Low $47.01

52-Week High $74.03

52-Week Low $44.37

Volume 886.3K

Avg Volume 1.8M

Mkt Cap. $11.40B

Shares Out 241.5M

EPS (TTM) $3.92

Div & Yield 1.20 (2.55%)

Ex Div Date 12/19/07

In a 2007, Financial News and Investment report entitled: "HOG (Harley-Davidson) Analysis" it is stated that "Harley-Davidson (HOG) is the iconic American motorcycle manufacturer." Harley-Davidson is actually more than a brand in various ways in that very few companies have their brand tattooed on the bodies of customers and other individuals. Recently, Harley-Davidson stock has declined and this is stated to be because of "stagnant or slightly declining year over year sales." (Financial News and Investments, 2007) the report relates that Harley-Davidson has "a P/E of '12 and price to cash flow of about 13." (2007) Price to book value is approximately 4 and the dividend yield for the stock is approximately 2%. Harley-Davidson stock is relatively cheap and extremely difficult to "replicate the Harley brand for the market cap of the company which is about 13 billion. Intangibles do add significantly to the book value of Harley-Davidson. When examining the cash flows and return on equity the cash flow over the past three years have been 960, 762, and 998 million dollars respectively while the free cash flow has experienced a variation from 708 to 782 million respectively with a return on equity at approximately 29% to 39% most recently. Year-over-year sales in the United States has declined for Harley-Davidson by approximately 5%. Even allowing consideration for the cash flow stagnancy of Harley-Davidson, Harley-Davidson stock will still remain a sound long-term investment although immediate upside on the investment may not be forthcoming.

The following figure illustrates the decline in Harley investor stock over the first three quarters of 2007 from approximately 72.00 to 47.00 during that span of time.

Harley-Davidson Investor Stock Decline During First Three Quarters of 2007

1d

5d

3m

6m

1y

2y

5y max

Everyone is not so optimistic about investing in the Harley-Davidson, Inc. stock and as reported in the work entitled: "Disturbing Trends at Harley-Davidson: Why it's Time to Sell" states in a April 10, 2007 'Seeking Alpha' Transport Stock investment analysis that since Reese Fund analyst, Wes Golladay made the suggestion that inventory issues are likely to plague HOG that after statistical work revealed some "disturbing trends in one of America's great brands." (Seeking Alpha, 2007) Specifically stated is: "These trends lead us to assign a Sell rating to Harley-Davidson and a near-term price target of $50 a share. Stated are the following thesis of the investment analysis being reported:

Dealer inventory contributing significant EPS

Delivery Estimate Indicates Earnings Miss;

No Work-off in Q1 Dealer Inventory; and a Inventory Balloon. (Seeking Alpha, 2007)

By the end of 2006 it is related in this report that dealer lots contained $1.00 additional EPS attributed to overhand from over-delivery in the previous 24 months leaving investors paying approximately 18x PE TTM vs. The current 15.6x TTM. Additionally HOG's EPS delivery estimates at 64,000-70,000 has been statistically stated to have a high probability of being quite lower than the going.73 estimate on the street with the model strike Q1 in the range of.53 -.62 a share. (Seeking Alpha; 2007; p.1; paraphrased) Next, no retail inventory was expected to have been worked off during the 2nd quarter of 2007 being reported "even with a strike-reduced shipment count for Q1" resulting in shipping needs being much lower for the remainder of the year and to include lower pressures in pricing. Finally, the Seeking Alpha Transport Stocks investment analysis relates that a survey conducted showed that there is 2 1/2 to 3 1/2 more inventory than in the first quarter of 2004.

During this quarter, the stock risk grew for downgrading of stock in an environment of growing pressure upon what was already stock exceeding projected costs for the Harley-Davidson company and its investors. Seeking Alpha undertook this investment analysis through use of a methodology that had three specific tools for research in arriving at the reports conclusions which were the tools of: (1) an EPS logarithmic regression model that uses seasonality, shares outstanding and deliveries to predict HOG EPS; (2) a Holt-Winter's model to help predict Harley retail sales, trend and seasonality; and (3) a Survey of 56 dealerships online new inventory conducted between March 28th and March 30th. (Seeking Alpha, 2007)

II. Over-Delivery to Dealer Lots - Backlash Against New Stock Owners

It is noted in this report that motorcycle sales are seasonal yet HOG's revenues are not therefore, if operational expense is to be reduced "the company delivers cycles consistently throughout the year. Unfortunately, this crates the temptation to beat earnings by shipping more cycles than necessary." (Seeking Alpha, 2007) Seeking Alpha reports tracking from Q1 2004 where sales and deliveries… [END OF PREVIEW] . . . READ MORE

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