HARLEY-DAVIDSON INC.: DIVIDEND DISCOUNT VALUATION
CASE STUDY SOLUTION
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SYNOPSIS
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In late July 2018, Aditi Basu, a buy-side analyst at Dimensional Wealth Group (DWG), a privately owned
investment management firm, had to recommend whether DWG should increase, decrease, or not change
its position in Harley-Davidson Inc. (Harley-Davidson) stock (ticker symbol HOG). DWG had been bullish
on its Harley-Davidson stock, leading DWG to increase its position in Harley-Davidson substantially over
n
time. However, Harley-Davidson was currently facing several challenges, which suggested that the timing
was appropriate for DWG to reconsider its bullish position. How should Basu determine a suitable
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recommendation regarding the Harley-Davidson stock?
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So
OBJECTIVES
• Assess the opportunities and risks associated with investment in a company’s stock, considering
strengths, weaknesses, opportunities, and threats.
• Reinforce financial statement analysis as an important tool for sizing up a company.
• Understand the key advantages and disadvantages, assumptions, and mechanics associated with using
single- and two-stage DDMs to value a company’s stock.
The Case Solution Starts From page 6
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ASSIGNMENT QUESTIONS
1. Describe Harley-Davidson’s business. What are the industry’s growth prospects? How competitive is
the business?
The Case Solution Starts From page 6
,2. Describe Harley-Davidson’s strategy. Given your assessment of the industry’s key success factors, how
likely is the strategy to drive growth?
3. What are Harley-Davidson’s strengths and weaknesses? What are its greatest threats and opportunities?
As part of your analysis, use case Exhibits 4–7 to perform a financial size-up of Harley-Davidson.
4. Using a single-stage DDM, what growth rate in dividends is implied by the current share price of $44.48?
How does this growth rate compare with rates implied from consensus analyst forecasts in case Exhibit 8?
5. Using the information provided in the case, develop a two-stage DDM model for Harley-Davidson. Consider
the appropriate sensitivities to your model inputs. What is your target price for Harley-Davidson stock?
6. As Basu, what recommendation would you make regarding the attractiveness of Harley-Davidson stock
for DWG?
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The Case Solution Starts From page 6
,ANALYSIS
1. Describe Harley-Davidson’s business. What are the industry’s growth prospects? How
competitive is the business?
As noted in case Exhibit 2, Harley-Davidson has two primary business segments. The first, motorcycles
and related products, will be most familiar to students, as it manufactures and sells motorcycles, and
produces and sells Harley-Davidson–branded general merchandise (e.g., clothing). The second business
segment is financial services, which provides financing to customers purchasing Harley-Davidson goods.
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Essentially, Harley-Davidson is both a manufacturer and a financial institution. While financial institutions
are ubiquitous, and virtually all students have some customer relationship with one, the business model for
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financial institutions is not simple and may be unfamiliar to most students.
At its core, a financial institution borrows money (through deposits or wholesale funding), which enables
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So
The Case Solution Starts From page 6
, EXHIBIT -1: HARLEY-DAVIDSON INC. DIVIDEND DISCOUNT MODEL, 2018–2023
Inputs
Required Return 8.0%
Terminal DPS Growth 3.0%
2018 2019 2020 2021 2022 2023
Years from Today: 1 2 3 4 5
EPS $2.92 $3.18 $3.56 $4.06 $4.34 $4.65
EPS Growth 8.9% 11.9% 14.0% 6.9% 7.1%
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Dividend Payout 50.3% 47.2% 43.8% 44.3% 44.9% 45.2%
DPS
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Sa
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tio
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So
CASE STUDY SOLUTION
e
pl
m
SYNOPSIS
Sa
In late July 2018, Aditi Basu, a buy-side analyst at Dimensional Wealth Group (DWG), a privately owned
investment management firm, had to recommend whether DWG should increase, decrease, or not change
its position in Harley-Davidson Inc. (Harley-Davidson) stock (ticker symbol HOG). DWG had been bullish
on its Harley-Davidson stock, leading DWG to increase its position in Harley-Davidson substantially over
n
time. However, Harley-Davidson was currently facing several challenges, which suggested that the timing
was appropriate for DWG to reconsider its bullish position. How should Basu determine a suitable
tio
recommendation regarding the Harley-Davidson stock?
lu
So
OBJECTIVES
• Assess the opportunities and risks associated with investment in a company’s stock, considering
strengths, weaknesses, opportunities, and threats.
• Reinforce financial statement analysis as an important tool for sizing up a company.
• Understand the key advantages and disadvantages, assumptions, and mechanics associated with using
single- and two-stage DDMs to value a company’s stock.
The Case Solution Starts From page 6
, e
pl
m
Sa
n
tio
lu
So
ASSIGNMENT QUESTIONS
1. Describe Harley-Davidson’s business. What are the industry’s growth prospects? How competitive is
the business?
The Case Solution Starts From page 6
,2. Describe Harley-Davidson’s strategy. Given your assessment of the industry’s key success factors, how
likely is the strategy to drive growth?
3. What are Harley-Davidson’s strengths and weaknesses? What are its greatest threats and opportunities?
As part of your analysis, use case Exhibits 4–7 to perform a financial size-up of Harley-Davidson.
4. Using a single-stage DDM, what growth rate in dividends is implied by the current share price of $44.48?
How does this growth rate compare with rates implied from consensus analyst forecasts in case Exhibit 8?
5. Using the information provided in the case, develop a two-stage DDM model for Harley-Davidson. Consider
the appropriate sensitivities to your model inputs. What is your target price for Harley-Davidson stock?
6. As Basu, what recommendation would you make regarding the attractiveness of Harley-Davidson stock
for DWG?
e
pl
m
Sa
n
tio
lu
So
The Case Solution Starts From page 6
,ANALYSIS
1. Describe Harley-Davidson’s business. What are the industry’s growth prospects? How
competitive is the business?
As noted in case Exhibit 2, Harley-Davidson has two primary business segments. The first, motorcycles
and related products, will be most familiar to students, as it manufactures and sells motorcycles, and
produces and sells Harley-Davidson–branded general merchandise (e.g., clothing). The second business
segment is financial services, which provides financing to customers purchasing Harley-Davidson goods.
e
Essentially, Harley-Davidson is both a manufacturer and a financial institution. While financial institutions
are ubiquitous, and virtually all students have some customer relationship with one, the business model for
pl
financial institutions is not simple and may be unfamiliar to most students.
At its core, a financial institution borrows money (through deposits or wholesale funding), which enables
m
Sa
n
tio
lu
So
The Case Solution Starts From page 6
, EXHIBIT -1: HARLEY-DAVIDSON INC. DIVIDEND DISCOUNT MODEL, 2018–2023
Inputs
Required Return 8.0%
Terminal DPS Growth 3.0%
2018 2019 2020 2021 2022 2023
Years from Today: 1 2 3 4 5
EPS $2.92 $3.18 $3.56 $4.06 $4.34 $4.65
EPS Growth 8.9% 11.9% 14.0% 6.9% 7.1%
e
Dividend Payout 50.3% 47.2% 43.8% 44.3% 44.9% 45.2%
DPS
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Sa
n
tio
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