Harley Davidson Analysis Report: Solvency and Profitability Essay

Published: 2020-02-17 21:40:43
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Category: Harley-Davidson

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The purpose of this analysis report is to discuss the solvency and profitability of Harley-Davidson, Inc. (HOG) and formulate a measurement for is financial standing and profitability by comparison to the Industry in which it resides. Solvency is determined from data collected in the 2012 SEC Harley-Davidson, Inc. 10K report, and calculated based upon the solvency ratio; Solvency equals After Tax Net Profit plus Depreciation divided by Long Term Liabilities plus Short Term Liabilities.

According to Investopedia. com the general rule of thumb is that a company with a solvency ratio greater than 20% is considered a financially healthy entity and this will be the baseline for this report since the average solvency ratio for the Heavy Weight Motorcycle market is unknown. Profitability can be determined by several different methods to include ratios such as management effectiveness measurement like, Return on Investments, Return on Equity, and Return on Assets.

However, profitability at its simplest, and most complete form, can be measured by revenue less expenses or by Gross Profit Margin which is calculated by Sales minus Cost of Goods Sold divided by Sales. All additional data for industry comparisons for profitability are derived from the Factiva Company Report: Ratio Comparison Report and the 2012 SEC Harley-Davidson, Inc. 10K report. H-D is divided into two major segments which are Motorcycles & Related Products, and the Financial Services segments.

The motorcycle segment builds and sells motorcycles wholesale in addition to accessories, parts, merchandise, and deals in licensing of the companies trademarks. H-D exclusively builds street legal heavy weight motorcycles intended for freeway use with engines ranging from 883 ccs to 1803 ccs (Heavy weight motorcycles make up a specific market type and are define as street legal motorcycles with an engine displacement of 651 cubic centimeters or greater).

H-D is known for pioneering touring and cruiser otorcycles, is currently the international market leader in this genre of motorcycles, and reportedly makes up 62% of all United States heavy weight motorcycle sales. H-D motorcycles are sold through an independently owned retailer network that are predominately insured and financed by the financial segment of H-D Inc. The financial segment, which is known as Harley-Davidson Financial Services (HDFS), provides wholesale and retail financing as well as insurance products and related programs both to retailers and customers of H-D.

The North American Industry Code for which H-D falls under is 33699; Motorcycle, Bicycle, and Parts Manufacturing. Analysis: Harley-Davidson, Inc. is a very stable company with a loyal following of consumers. HD has built a name and reputation that allows them to enjoy success and remain profitable in a fairly consistent market even in times of economic down turn. Despite decreased sales in 2009 the company had also found ways to increase their profit margins. The company sites that they were able to increase their profit margins by finding ways to streamline processes to reduce cost.

In 2011 retail sales increased by about 3. 5%, international sales by 11. 3% and the total revenue from motorcycle sales increased by 2. 5%. Additionally, HD announced that they increased their net income by about 73. 5% as a result from increases in quarterly earnings. Currently HD has stayed with the status quo of dominating the market that they created. By comparison to other entities in their industry HD is leading the pack. The 5 year average of HDs Gross Profit Margin is 41. 04% to the industry average of 15. 51%.

The reason HD enjoys such a higher profit margin can be correlated to the companys high solvency percentage. HD has relatively low long term and short term debt and their ability to pay the debt they have is very high. The solvency ratio for HD is calculated at 41. 5% which would by definition classify them as a very healthy entity. It could be speculated that one reason HD has such a high ratio is because they are not investing in the growth of their company and one might come to the conclusion that they are stagnant when in actuality this is not the case.

When you look at their growth rates you have to take into consideration optimum performance levels. HD is deficient in every Growth Rate Ratio across the board. Revenue Growth, Earnings Per Share, Capital Spending Growth all significantly lower than that of their competitors. However, my opinion is that the reason behind this is that they are already a well-established company who are already operating at the optimum level at which their market demands.

All of the other companies in HDs shadow are trying to play catch up so they have larger percentages of growth by comparison; however they suffer in profitability as a result of their growth rate. This theory is further corroborated by analyzing all of the profitability ratios, management effectives ratios and the disparity those numbers reflect between HD and its competitors. The 5 year average for Operating Margins is 15. 61% over the industry average of (-2. 22%).

I would once again reference that the operating margins are high because of HDs foot hold in their industry which is also echoed in their Net Profit margin ratio of 7. 86% over the industry comparison of (-0. 48%). Comparisons for Pre-Tax Margin Ratios are 12. 5% to the industries (-0. 46%). This is a good indication that HD in contrast to its competitors is generating larger profit margins. The higher the pre-tax margin the higher the pre-tax profits. Additionally this ratio reiterates that the operating cost is low enough to allow for HD to accrue healthy earnings.

However a caveat that I would like to mention is that HD like many other companies does keep long term debt which allows HD to also keep their tax margins lower. Keeping debt over equity when managed properly can be an effective way to increase cash flow in a company since lower taxes equal higher cash flow. To echo HDs superiority in profit margins over its competitors we see that the Tax Rate Margin is 39. 32% over the industry 29. 41%, once again this is an indication that they are leading their market in profitability.

When analyzing the Management Effectiveness data to include ROA, ROI, and ROE we find that HD is by no surprise ahead of the curve in all areas except for ROE. HDs Return on Assets is 4. 71% to its industry average of 3. 29%; the Return on Investment is 7. 18% to the industry average of 4. 10%; and the Return on Equity is 16. 86% to the industries 23. 66%. It is no surprise that the ROA and ROI of HD are higher than the industry averages, and it is also apparent that shareholders ROE is low as a correlation to HDs slow growth rate.

However HDs ROE is not indicative to their overall profitability. Conclusion: Because HD is a very steady company they would not be one of the companies you would want to invest in to get rich overnight but they would be a very safe company to invest in long term. Historically they have increased consistently in single digit percentages annually on the stock market. Additionally across the board HD displays shining numbers that indicate that they are a well-managed and profitable company.

There are no indications that HD will experience any down turns in profitability or solvency in the foreseeable future. HD continues to prove itself as the originator and industry leader in the manufacture and wholesale of Heavy Weight Motorcycles. Despite what I see as market limitations HD continues to find ways to increase profit margins by utilizing or pioneering industry best practices and streamlining processes to ultimately benefit its long term standings in the industry as well as benefit the shareholders that hold equity in its existence.

Additionally historically HD has only catered to the older generations of consumers do to the high cost of its luxury products. HD is finding ways to offer more affordable entry level products that cater to the stylization that are appealing to a younger market and I foresee that they will continue to see higher levels of profitability as these market strategies mature.

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