What’s in a Name? – Rumors about Harley Davidson
Lawrence A. Sautter, 3 July 2016
Rumors should come without surprise, especially on Fridays when options are set to expire. It keeps investors thinking over the weekend. Sleepless nights? Imagine, markets without rumors? What a boring stock market and life it would be.
Valuation and debt. (leverage)
What’s in a name? Brand recognition and the Harley-Davidson lifestyle.
Harley-Davidson and KKR declined to comment.
Valuation and debt
HOG is valued at a forward P/E of just 13.4x. The company trades at a price/sales of 1.8x and an EV/sales of 2.75x. The company is leveraged with $7 bn debt.
If the price of the acquisition would be 65$ per share or even higher, valuing the company around $11.5B or more and a 11x multiple to the Ebitda. This would imply a minimum additional 20% potential gain.
If you go for a fair value of $70 you would have a healthy margin of safety of approx. 22%.
What’s in a name? - Or the goodwill and value of brands, accounting for intangibles
The brand is the most valuable asset at most companies. It is also the most difficult asset to hang a dollar sign on. With intangible assets accounting for as much as 80% of market value of the S&P 500, being able to forecast the value of brands is essential to investors. Although brand value may be abstract, it is still the single most important thing about most stocks.
Goodwill is something which only arises when a business is sold and until this happens the value of goodwill is not included in balance sheet assets. In this view, goodwill is the difference between the price paid for the business and the value of its net assets at that time.
According to Interbrand, the Harley-Davidson brand is worth $5.4B (up 14% compared to last year) and it is the 79th most valuable brand worldwide.
Determine the economic value of your brand’s premium market position
When businesses get ready to sell brands, often they begin by calculating the actual economic advantage of the brand. You can assess your own economic advantage by watching two indicators:
· Price elasticity: When your consumer demand remains high even when your prices go up, your brand enjoys pricing leeway known as favorable price elasticity. Price elasticity usually results from high brand value and usually leads to premium pricing.
· Premium pricing: To assess your brand’s pricing advantage, determine how much extra consumers are willing to pay in order to purchase your branded product instead of the offering of a lesser-known or lesser-valued brand. This difference, multiplied by your sales volume, indicates the economic value of your premium market position.
In other words, high brand value leads to favorable price elasticity, favorable price elasticity leads to premium pricing, and premium pricing leads to higher brand equity.
Adjust your result to account for future brand performance projections.
These projections include the likelihood that customers will continue to behave in a similar manner in the future, that the brand’s current economic reality is transferable to new owners, and that the brand’s momentum will continue at its current pace.
For example, if a service business commands premium pricing in large part due to the powerful reputation of the owner, and if the owner wants to sell the brand and depart the business, then the value of the price premium would likely be discounted by those considering a purchase of the brand.
When calculating the worth of a brand’s premium price position, be aware that the number you arrive at is a valuation starting point, not the finishing line. The effect of future brand-building activities, market growth or retraction trends, actions of competitors, and other market realities affect whether the value of the price premium should be adjusted upward or downward in assessing the brand’s worth.
"If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than
- John Stuart, Chairman of Quaker (ca. 1900)
On Rumors and Takeover chatter:
Always ask yourself if it is worth chasing and if you should play the news?
Would a buyout make sense? And at which price?
Harley-Davidson is more than a brand! However, to quantify that value is more an art than science!
Harley-Davidson is almost a philosophy, committed to preserving an renewing the freedom to ride.
Opportunity or Challenge?
Product evolution and innovation for loyal customers and a new generation
The motorbikes of the future with its all-electric motorbike.
This type of product is likely to excite a younger, environmentally friendly crowd. But only if Harley-Davidson stays loyal to it’s self and sticks to its traditional roots, keeping it’s style and myth story a life, while transforming slowly into the next generation.
Long term prospects look interesting. One alternative strategy would be to sell put options at a strike of 50$. For example, Nov 18 can be sold for approximately bid $2.90. This would guarantee a nice income if the option is not exercised (probability of 67%) with a yield boost of 15% annualized, and a safe point of entry if it is trading at 47.1$/share. Alternatively, it would be possible to buy call options and/or buy the shares directly on a pull-back, if you have the chance.
Not only KKR, also Honda, Suzuki and Kawasaki could be interested.
I whish you a very nice ride, either on the stock-exchange or enjoing your free ride outdoors.