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Schedule 1

FIN 286 - Summer/Fall 2013

Valuation of Harley Davidson as of ~ July 1, 2013


INPUT BOX

Discount Rate (WACC)

13.0%

Near-term sales growth 2014

12.0%

Near-term sales growth 2015

10.0%

Terminal Sales & Cash Flow growth

4.0% 2.5% inflation + 1% pop growth = 3.5%; but good growth in growing markets and VERY strong brand

Near-term EBIT margin 2014

18.0%

Near-term EBIT margin 2015

18.0%

EBIT margin - Terminal


est. Value of HOG Equity at 7/2/2013

22.0%

11,252,332

# shares outstanding at 7/1/2012

HOG equity value per share

224,139 thousand ( Q213 income statement and Tearsheet at 8/2/2013 )

50.20

vs

market price

55.54 @ July 1, 2013

3 full years historical


2010
2011

60.66 @ Sept 3
Full Year
6 mos. (proj) act. + proj.

6 mos (actual)

2012

6/30/2013

12/31/2013

2013

2014

4,942,582

3,045,714

2,490,098

5,535,812

6,200,109

Projection Period
2015

Terminal

Net Operating Revenues (Sales)


Motorcycles & Related Products

4,176,627

4,662,264

Growth

11.6%

6.0%

12.0%

12.0%

6,820,120

7,092,925

10.0%

4.0%

Costs and Expenses


Motorcycle COGS
% of sales

2,749,224
66%

3,106,288
67%

3,222,394
65%

1,924,402
63%

Gross Motorcycle Profit

1,427,403

1,555,976

1,720,188

1,121,312

% of sales

34%

Selling, Admin and Engineering Expense

1,020,371

% of motorcycle sales

33%
926,832

24%

Motorcycle Operating Income (EBIT)

407,032

EBIT Margin %

35%

35.75% took 2013 gross margin from mgt guidance

485,033

16%

970,066

19%

629,144

742,406

636,279

405,177

13.5%

15.0%

20.9%

16.3%

9.7%

1,979,053

35.75%

485,033

20%

3,556,759
64%

890,210

37%

977,782

20%

1,599,888

18%
1,008,987

1,116,020

18.2%

Average EBIT % of Sales for last 4 years

1,227,622

1,560,443

18.0%

18.0%

22.0%

36,444

36,444

36,444

14.1%

Investment Income
Interest Expense (don't include in unlevered CFs)
Income Before Taxes - unlevered (EBT)

5,442

132,963

7,369

4,164

4,164

8,328

90,357

45,266

46,033

23,090

23,090

46,180

412,474

762,107

749,775

640,443

409,341

1,017,315

1,152,463

1,264,065

1,596,887

142,451

354,025

401,057

439,895

555,717

Taxes (@ 34.8%; firm projection at Q213 news release)

34.8%

Unlevered Net IncomeFinall

412,474

762,107

749,775

640,443

34.8%

266,890

34.8%

663,289

751,406

34.8%

34.8%

824,170

1,041,170

Full Year
3 full years historical
2010
2011

6 mos. (proj) act. + proj.

6 mos (actual)

Projection Period
2015

2012

7/1/2012

12/31/2012

2013

2014

Terminal

266,890

663,289

751,406

824,170

442,865
8%

496,009
8%

545,610
8%

567,434
8%

81,329

53,144

49,601

21,824

248,393

206,154

226,769

255,345

Free Cash Flow Adjustments


START

Unlevered Net IncomeFinall

412,474

762,107

749,775

640,443

NWC = AR + INV - AP
NWC as % of sales projection

363,482
8.7%

381,332
8.2%

402,539
8.1%

361,536
5.9%

8%

1,041,170

NWC
IncrementalProjected NWC Cash Flow

Add:Depreciation

(in Note 20 biz segs)

248,246

near-term: depreciation as % of capex

95%

long-term: depreciation as % of capex

90%

168,659 ?

97%

124,196
95%

93%

% of sales (proj 4% near and 4% terminal)

179,988

4.0%

180,416

3.9%

69,267

3.7%

130,733

200,000

2.3%

217,004

3.6%

Guidance on CapEx at Q2 presentation deck #24


Nominal Free Cash Flows

95%

95%
90%

167,730

Less: Capex (also Note 20 - p.99)

173,959

148%

3.5%

238,704

283,717

3.5%

4%

200,000
492,990

756,078

738,018

260,354 $

630,353 $

687,412 $

762,634 $

990,974
6/30/2016

Nominal Terminal Value [= Terminal Nominal Free Cash Flow / (r - g)]

11,010,824
Assumed cash flow date : mid-year convention
Periods
Discount Factors (calculated using mid-year convention)
Discounted Free Cash Flows

Enterprise Value @ 7/1/2012 (=sum of discounted free cash flows)


net debt

10/1/2013

6/30/2014

6/30/2015

0.25

1.0

2.0

2.0

0.970

0.885

0.783

0.783

608,329 $

597,255 $

252,519

Add: Book value of cash & cash equivalents at 7/1/2012 (I used moto only, p 103 12/31/12)

863,350

Less: BV of Debt = Short-term debt + LT debt, @ 7/1/2012 (again, I used moto only from 10K p 103)

303,000

Less: BV of Pension Obligations = Pension and retirement healthcare and other LT liab @ 7/1/2012

330,294

Plus: BV of HDFS (book shareholder's equity in HDFS @12/31/12 from 10K, p. 103)

full year sales (from the K)

8,623,090
86%

941,083 $

4.20 /share

11,252,332

Harley Equity Value (Enterprise Value plus cash less book value of debt)

Estimation of seasonality

10,081,193

6/30/2015

2011

$ 4,662,264

2012
$

4,942,582

avg

1st 6 mos sales (from the Q) $ 2,402,788

51.5%

2,842,416

57.5%

55%

last 6 mos sales

48.5%

2,100,166

42.5%

45% 2nd 6 mos

$ 2,259,476

projected 2013

Page 1

1st 6 mos sales (from the Q)

3,045,714 I knew this

2nd 6 mos sales (est using 2012)

2,490,098

estimated full year 2013 sales

5,535,812

45% used GoalSeek to match average

file:///var/www/apps/conversion/tmp/scratch_3/261697010.xlsx

Scenario Summary
Current Values:

Changing Cells:
discount_rate
12%
Near_term_sales_growth_2014
14%
Near_term_sales_growth_2015
12%
Terminal_Sales___Cash_Flow_grow
4%
EBIT_margin_2013
15%
EBIT_margin_2014
18%
EBIT_margin___Terminal
22%
Result Cells:
HOG_equity_value_per_share
$
57.01 $
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in gray.

base case

13%
12%
10%
4%
18%
18%
22%
50.20

bad recession

BIG rebound

class tester

18%
-3%
-3%
2%
13%
11%
15%

10%
12%
12%
4%
18%
22%
27%

15%
80%
6%
4%
15%
15%
18%

19.74 $

89.09 $

50.00

Discount Rate (WACC)

13%

Near-term sales growth 2014

12%

Near-term sales growth 2015

10%

Terminal Sales & Cash Flow growth

4%

Near-term EBIT margin 2014

18%

Near-term EBIT margin 2015

18%

EBIT margin - Terminal

22%

HOG equity value per share

50.20

Schedule 2
Motorcycle and
related SALES

Operating Income
(EBIT)

yoy % change

Operating Margin
~ EBIT margin

year

2005

5,342,214

1,464,962

2005

27.4%

2006

5,800,686

8.6%

as % of 2006

1,597,153

2006

27.5%

2007

5,726,848

-1.3%

0.99

933,843

2007

16.3%

2008

5,578,414

-2.6%

0.96

684,235

2008

12.3%

2009

4,287,130

-23.1%

0.74

400,000

2009

9.3%

2010

4,176,627

-2.6%

0.72

407,032

2010

9.7%

2011

4,662,264

11.6%

0.80

629,144

2011

13.5%

2012

4,942,582

6.0%

0.85

742,406

2012

15.0%

2013 ann. Est.

5,535,812

12.0%

0.95

1,008,987

2013 ann. Est.

18.2%

2006-2007 a lot of buyers used home equity loans to buy Harleys;


home equity loans ended by mid-2007 with decline in house prices

16.6%

Operating Margin_x000d_~ EBIT margin


30.0% 27.4% 27.5%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%

16.3%
12.3%

13.5% 15.0%
9.3%

9.7%

18.2%

Schedule 3
Simple Working Capital calculations for Motorcycle Only
3 full years historical & 6 mos actual
2010

2011

2012

6/30/2013

AR

262,382

219,039

230,079

253,819

+ Inventory

326,446

418,006

393,524

307,717
200,000

- AP

225,346

255,713

221,064

= simple NWC

363,482

381,332

402,539

361,536

motorcycle sales

4,176,627

4,662,264

4,942,582

6,091,428

8.1%

5.9%

average

7.7%

% of moto sales

8.7%

8.2%

looks like the flex-manufacturing is working, and the number is trending down

Schedule 4
Cost of Equity using CAPM
Calculation of Cost of Equity for Harley Davidson WACC
Inputs:
(A)

(B)

(C)

3.40%

3.40%

3.40%

(a)

Beta

1.18

2.00

2.23

(b)

Market Risk Premium

5.0%

5.0%

6.0%

(c)

9.3%

13.4%

16.8%

(d)

Risk Free Rate

Cost of Equity by CAPM

(A) CAPM with Yahoo! Finance beta


(B) CAPM with Ibbotson beta
(C) Berk & DeMarzo text Table 10.6 shows Harley equity beta = 2.23 using monthly returns 2007-2012

(a)

Source: US Treasury website; 20 year Treasury rate /www.treasury.gov/ @ 8/2/2013; 20-year rate 3.39%

(b)

Beta from Yahoo! Finance and Ibbotson

(c)

Source for MRP%: academic studies and my own opinion and more recent data

(d)

Cost of Equity = Risk Free Rate + Beta*(Expected Risk Premium)

Cost of Equity using FF-3factor model


Fama-French Cost of Equity
FF Cost of Equity
Risk Free Rate

=
=

3.40%

FF-Beta

1.36

MRP

5.0%

SMB Premium

3.72%

HML Premium

4.84%

18.8%
Risk-free + FF-Beta X MRP + SMB prem + HML Prem

Schedule 5
Calculation of Cost of Debt - use bloomberg or notes to financials
or you can use one of the credit curves below

Schedule 6
WACC Calculation
# shares of equity

224,139

value of equity per share

total amount of equity

cost of equity

first valuation sheet

55.54 plug at market value TO START


12,448,680
13.4% CAPM with ibbotson beta

total LT debt

303,000 motorcycle debt; no HDFS debt

cost of debt (pre-tax)

2.80% Harley is BBB; used curve at 5 years

tax rate

34.8% first valuation sheet

cost of debt (after-tax)


total capital (D+E)

1.8%
$

12,751,680

% equity (market value)

97.6%

% debt (book value)

2.4%

WACC

13.1%

WACC Calculation - second iteration with first calculated price


# shares of equity

224,139

value of equity per share

50.20

total amount of equity

11,252,332

cost of equity

first valuation sheet


calculated price from 1st run

13.4% blend of CAPM and Fama-French

total debt

303,000

cost of debt schedule

cost of debt (pre-tax)

2.80% cost of debt schedule

tax rate

34.8% first valuation sheet

cost of debt (after-tax)


total capital (D+E)

WACC

1.8%
$

11,555,332

% equity

97.4%

% debt

2.6%
13.1%