Steve Gorelik of Firebird Management presented his in-depth investment thesis on Harley Davidson (NYSE: HOG) at Wide-Moat Investing Summit 2018.

Thesis summary:

Harley Davidson is a motorcycle manufacturer with a widely recognized brand and ~50% cruiser/touring market share in North America, its most important market. Dominant size, proprietary dealership network, and a fan base willing to brand themselves with Harley’s logo ensure margins and ROIC double that of the competition.

Due to concerns about the North American motorcycle market and an unusual capital structure that includes the debt of the financing business, Harley trades at an FCF yield of 10+%. All of the FCF is paid out to shareholders in the form of dividends and buybacks.

The North American large motorcycle market is assumed to be in terminal decline due to changing preferences of younger consumers. However, registrations are near all-time highs and an increase in the average age of motorcycles suggests there is no change in preferences and that cruiser/touring sales should be 20% higher than recent levels.

Adjusting for leverage and the value of the highly profitable financing business, Harley Davidson trades at a mid-single digit EV/EBITDA multiple, well below fair value for high-quality business with a moat.

Listen to this session:

slide presentation audio recording

About the instructor:

In addition to being Head of Research at Firebird Management, Steve Gorelik is the Fund Manager of Firebird U.S. Value Fund as well as portfolio manager of Firebird’s Eastern Europe and Russia Funds. He joined Firebird in 2005 from Columbia University Graduate School of Business while completing education from a highly selective Value Investing Program. Prior to business school, Steve was an operational strategy consultant at Deloitte working with companies in various industries including banking, healthcare, and retail. He holds a BS degree from Carnegie Mellon University as well as a CFA (chartered financial analyst) charter and a membership in Beta Gamma Sigma honor society. Steve serves on the boards of Teliani Valley (Georgia), Arco Vara (Estonia), and Pharmsynthez (Russia). He speaks Russian, English and his native Belarussian.