Schedule 1

FIN 286 - Summer/Fall 2013

Valuation of Harley Davidson as of ~ July 1, 2013

INPUT BOX

Discount Rate (WACC)

10.0%

Near-term sales growth 2014

-5.0%

Near-term sales growth 2015

-5.0%

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%

12,620,855

# shares outstanding at 7/1/2012

HOG equity value per share

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

56.31

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

5,259,021

Projection Period
2015

Terminal

Net Operating Revenues (Sales)

Motorcycles & Related Products

4,176,627

4,662,264

Growth

11.6%

6.0%

12.0%

-5.0%

4,996,070

5,195,913

-5.0%

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

18.2%

Average EBIT % of Sales for last 4 years

946,624

899,293

18.0%

18.0%

1,143,101

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

983,067

935,736

1,179,544

142,451

354,025

342,107

325,636

410,481

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

640,960

34.8%

34.8%

610,100

769,063

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

640,960

610,100

769,063

442,865
8%

420,722
8%

399,686
8%

415,673
8%

81,329

(22,143)

(21,036)

15,987

248,393

174,862

166,119

187,053

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%

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%

184,066

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%

174,862

207,837

3.5%

4%

200,000
492,990

756,078

738,018

260,354 $

630,353 $

653,900 $

622,393 $

732,292
6/30/2016

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

12,204,863
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

0.976

0.909

0.826

0.826

594,454 $

514,374 $

254,223

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)

10,086,664
88%

941,083 $

4.20 /share

12,620,855

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

Estimation of seasonality

11,449,716

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_3/261696747.xlsx

2X2 Data Table

2X2 Data Table for GH Harley Valuation - Fall 2013
Discount Rate (WACC)

10.0%

Near-term sales growth

2009-2013

-5.0%

this cell set equal to the first column input cell address,
which is C9. The valuation sheet links to this page for
inputs. The discount rate cell in the driver box at the top
of the first page is linked to this cell on this 2X2 data
table page (the discount rate cell on page 1 has this
cell's address).

THIS IS THE COLUMN INPUT CELL.

near-term 2014 & 2015 growth rate (g) [terminal g = 4%]
$

56.31

-5%

-2.5%

0%

5%

10%

10%
discount
rate

12%
14%
16%

This is the OUTPUT

CELL, which is the
stock price of Harley
as calculated on the
valuation sheet with
these different input
combinations.

this cell equal to the first row input cell in the 2x2, which is cell address D8, the
value
-5%. The valuation spreadsheet at the front of this book is then linked
to this cell, so the near-term sales growth cell in the driver box is linked to this
cell (has this cell's address in it), so that the row input values will get run
through the valuation spreadsheet.

THIS IS THE ROW INPUT CELL

to "activate" the data table -

1. first delete the entries in the data table (the black numbers under and to the right of the blue numbers)
2. select a rectangle with the output cell (stock price) at the top left and with bottom-right entry in the
data table as the bottom right corner of the rectangle
3. in top menu, select Data > What-If > Data Table
4. identify row input cell and column input cell
5. hit OK

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

56.31

total amount of equity

12,620,855

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%
$

12,923,855

% equity

97.7%

% debt

2.3%
13.1%