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By Jaime M. Katz, CFA | 09-02-2015 03:00 PM

Harley-Davidson: A Good Time to Hop On

The wide-moat hog-maker is trading at a significant discount and should manage to grow annual unit sales for years to come.

Jaime Katz: Harley-Davidson (HOG) is one of our wide-moat names currently trading at a significant discount to our $68 fair value estimate.

Despite some near-term hiccups from foreign exchange and competitive discounting in the domestic market, we believe the brand loyalty the company has garnered over the last hundred years will help continue to generate rising unit sales over time--particularly as international and outreach consumers are focused on increased global brand penetration.

Outreach has been a key driver of unit sales over the last few years and was something we were initially skeptical about. However, Harley has become number one in its outreach markets, which include youth, women, African Americans, and Hispanics. And this segment has grown at twice the rate of core consumers in the past.

We think this is a result of Harley's customer-led innovation, which has built recent product launches on consumer-driven data, matching product with demand more closely and tailoring offerings to specific riders. Bikes like the newer Street model have come from this customer focus; it's a low-priced product that has really resonated with customers and has the potential to be an entry-level Harley purchase for many in international markets who are seeking motorcycles at a different price point suited to different infrastructure.

Overall, we see the focus on the consumer as something that will take Harley successfully through the decade and will help increase annual unit sales nearly back to peak levels around 2020. In our base-case scenario, this leads to motorcycle operating margins around 20%, thanks to improved [selling, general, and administrative expenses] metrics that leverage over higher volumes and underlie our $68 fair value estimate. With Harley trading around $55, shares trade in 4-star territory. We view shares as compelling at their current level.

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