Has Harley-Davidson Become the Perfect Stock?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Harley-Davidson (NYS: HOG) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth.Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins.Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet.At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities.Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation.You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends.For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Harley-Davidson.
|Growth||5-Year Annual Revenue Growth > 15%||(2.6%)||Fail|
|1-Year Revenue Growth > 12%||9.0%||Fail|
|Margins||Gross Margin > 35%||36.8%||Pass|
|Net Margin > 15%||6.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||215.1%||Fail|
|Current Ratio > 1.3||1.82||Pass|
|Opportunities||Return on Equity > 15%||15.5%||Pass|
|Valuation||Normalized P/E < 20||18.74||Pass|
|Dividends||Current Yield > 2%||1.3%||Fail|
|5-Year Dividend Growth > 10%||(10.3%)||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Harley-Davidson has come a long way since last year. When we looked at the stock in 2010, it only managed to score a single point. Better gross margins, higher returns on equity, and a cheaper earnings multiple all pushed Harley closer to perfection, although the motorcycle maker still has plenty of work to do.
Several years ago, Harley looked like it might be doomed to ride off into the sunset. Even before the financial crisis hit, the company struggled with bulging inventory and falling motorcycle sales. Some analysts believed that selling out to private equity was the company's best option.
But Harley resisted that suggestion, instead embarking on a campaign to reduce its stable of unsold cycles and making major strategic moves. In particular, it killed off its Buell line and planned to sell its MV Agusta division, focusing on its core business. The move, which mirrored what automakers Ford (NYS: F) and General Motors (NYS: GM) did with their automotive divisions, was geared toward restoring the brand to its former glory.
Recently, those efforts have paid off, as Harley has simply raced past its competition. In its most recent quarter, Harley managed to grow revenues 15%, most of which came from bike sales rather than its financing division. That goosed free cash flow up, yet the company has held inventory and accounts-receivable growth below the rate of sales growth. Meanwhile, competitors Honda (NYS: HMC) and Polaris (NYS: PII) have struggled to produce lower operating profit margins than Harley, as has Arctic Cat (NAS: ACAT) .
With an economy that is still teetering on the edge of recession, Harley isn't out of the woods yet. But the progress it has made is admirable, and with one of the strongest brands in the industry, Harley has plenty of opportunities to continue its march toward perfection.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of General Motors and Ford. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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