Harley-Davidson (HOG) PT Lifted to $61 at Morgan Stanley
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Morgan Stanley analyst Adam Jonas reiterated an Overweight rating and raised his price target and and roll forward their hypothetical LBO model on Harley-Davidson (NYSE: HOG) following Q3 results. The price target moves to $61.00 (from $54.00).
"We continue to view HOG as a slow growth or ex-growth annuity stream that could spin off enough cash to take the shares off the market over time," Jonas said.
The analyst highlighted the following 3 key thoughts on HOG following their model update:
1. Our earnings estimates are very little changed following 3Q. Our reported EPS forecast falls less than 1% for 2017 to $4.17 vs. consensus of $4.21. Importantly for the HOG investment story, we forecast 2017 free cash flow of $659mm (6.6% FCF yield) of which we expect 83% to be returned to shareholders through dividends and share buybacks. The capital allocation strategy of HOG continues to reflect a management team who understand the value of the core franchise that even in the face of demographic headwinds, can enjoy a highly profitable and cash generative journey.
2. Our target rises to $61 from $54 mainly from rolling forward our DCF reference point by 1 year to the beginning of 2017. We continue to value HOG on a 5-year hypothetical LBO model. The low level of financial leverage (net debt neutral in the core motorcycle business), highly loyal customer base, relatively low capital requirements/regulatory constraints and very high cash flow conversion (over 90% of net income), lends itself to an attractive valuation under this methodology. We assume a 25% hurdle rate. A move to a 20% IRR/hurdle rate would support a valuation of approximately $68.
3. HOG positioning post US election: China accounts for a fraction of 1% of sales for HOG and there is no Mexican production. Significant exposure to US domestic oil patch states. Rebound in construction and energy dovetails with the sweet spot of HOG’s core US motorcycle demographic. Watch the FX though. Stronger US$ vs. currencies such as Yen can present a transaction risk and competitive risk over time. Neutral to positive on a relative basis.
Shares of Harley-Davidson closed at $58.65 yesterday.
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Create E-mail Alert Related CategoriesAnalyst Comments, Analyst PT Change
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