What Could Hurt Harley-Davidson’s Valuation Multiples in 2Q17?
Harley-Davidson’s valuation multiples
As of April 18, 2017, Harley-Davidson’s (HOG) forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is 12.3x. The multiple is calculated based on the company’s estimated EBITDA for the next 12 months.
HOG’s EV-to-EBITDA multiple is significantly higher than the multiple of Japanese motorcycle maker Honda (HMC), which is 6.5x.
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Forward PE multiple
HOG’s forward PE (price-to-earnings) multiple, based on its earnings forecast for the next 12 months, stands at 14.4x. That’s much higher than Honda’s multiple of 8.8x.
It’s important to note that Harley-Davidson commands higher valuation multiples because it’s a global leader in the premium heavyweight motorcycle segment.
In the auto industry (XLY), Ferrari (RACE) typically trades at a much higher valuation multiple than major US automakers such as General Motors (GM) and Ford Motor (F). That’s partly because Ferrari has a strong presence in the luxury vehicle segment, which yields higher margins than mass-marketed vehicles.
What could affect multiples?
During its 1Q17 earnings event, HOG informed investors that it estimates its 2Q17 shipments to be about 4.0%–9.0% lower on a YoY (year-over-year) basis. With this, the company has guided to ship about 80,000–85,000 motorcycle units in the second quarter.
However, the company’s management reiterated its fiscal 2017 guidance. It expects the company’s gross margin to remain strong and in line with its fiscal 2016 gross margin.
At a time when HOG’s global sales are softening, it becomes more important for the company to protect its margins. So any indication of HOG’s weakening profitability could hurt its future earnings estimates and drive its valuation multiples lower.
In the next and final part of this series, we’ll take a look at Wall Street analysts’ recommendations for Harley-Davidson stock after its 1Q17 results.