Hog Wild in China

Crista Huff
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Posted: Sep 19, 2011 12:01 AM

Harley-Davidson (HOG, $37.50) is working to expand dealerships and sales in China, says Bloomberg.com. (Read “Harley-Davidson Faces Entry Barrier in China”). Harley-Davidson successfully sells motorcycles worldwide, but significant expansion into China could really boost its growth rate. “International sales represented 35 percent of its revenue last year, up from 25 percent in 2006, according to the company. Harley wants to increase that to sat least 40 percent by 2014.”

China is the largest motorcycle market in the world, and Harley sold a little more than 200 bikes in China last year.    

The problem lies in the Chinese regulatory environment. “About 100 cities in China, including Beijing and Shanghai, have restrictions that include banning two-wheel vehicles from elevated highways and major thoroughfares to curb noise and thefts, according to the state-affiliated Society of Automotive Engineers of China.”

Presuming modest annual international sales growth and continued barriers to Chinese sales, how does Harley’s stock look to investors today?

Recent sales and net income have been bouncing around year-over-year amid restructuring costs and losses from discontinued operations. The company now has almost $1 billion cash on hand and has recently increased its quarterly dividend. Projected consensus earnings per share (EPS) are going straight up, showing growth of  112%, 27% and 24% in fiscal years 2011 through 2013. That gives Harley a 2011 PE of 16; and the stock pays an annual dividend of 1.33%. These numbers indicate an undervalued growth stock. Wall Street recognizes that value, because according to a Sept. 17, 2011 S&P report, 81% of the stock is owned by institutions.

Harley stock is slowly rebuilding from the 2008 Financial Meltdown and aforementioned corporate problems, at which time it fell from a high of $71 to the mid-teens. More recently, the stock has traded between $32 and $46, and I would expect it to retrace to the $46 area given a stable or strong stock market. At the current price, the stock is appealing to growth stock investors, value stock investors, and traders who would be happy with 10% in the short-term. 

My exit point on a short-term trade would be $42.


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