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Wednesday, January 15, 2014 - 14:30

This American Icon Is Up 20%, With More Upside Ahead...

Wednesday, January 15, 2014 2:30 PM

In my look last summer at what makes for a great brand, I alerted StreetAuthority readers to a rapidly growing, dividend-paying company that happens to be steeped in American legend and lore.

Gonzo journalist Hunter S. Thompson, actors Dennis Hopper and Peter Fonda, and the outlaw motorcycle club Hells Angels have all had a part in building the powerful mythos around this company -- one that has translated into massive profits for its investors.

When that article was published Aug. 1, this stock was trading around $57. Since that time, it has surpassed my target price, soaring close to 20% to a 52-week high near $70 in less than six months. Fortunately, it's not too late to capture additional upside in this 110-year-old company.

This company is continuing to post fantastic numbers, pays an unswerving dividend and participates in an aggressive share buyback program -- not to mention the fanatical loyalty it inspires in its customers.

If you haven't guessed, I'm talking about Harley-Davidson (NYSE: HOG).

The famed motorcycle company posted a blowout third quarter with a nearly 24% increase in diluted earnings per share and U.S. motorcycle sales revving up more than 20% compared with the same quarter the previous year. Net income rose to just under $163 million from $134 million.

Flickr/bjoern.gramm
Harley-Davidson continues to post fantastic numbers, pays an unswerving dividend and participates in an aggressive share buyback program -- not to mention the fanatical loyalty it inspires in its customers.

The improvement was driven by a new high-tech motorcycle line named Project Rushmore. These technologically advanced bikes are the first products of a 4-year-old initiative aiming for a faster release of new bikes and features.

CEO Keith Wandell said: "The 2014 model-year rollout was the biggest launch of new motorcycle models in the company's history. These motorcycles sold extremely well among both our traditional core customers in the U.S., as well as our outreach customers."

Among the reasons I like Harley-Davidson is its cost-saving program. The company expects to save about $320 million a year through cost restructuring, starting this year.

Adding a layer of security for long-term investors, Harley is a consistent dividend payer: Dividends have been paid consistently for the past 20 years, with a current annual yield around 1.2%.

Although this yield is below average, the company makes up for it with an aggressive stock repurchase program. In the third quarter, Harley-Davidson bought back 1.6 million shares for $92.8 million. There is authorization remaining for 11 million additional shares for the quarter.

Share repurchase programs aim to reduce the number of outstanding shares. As my colleague Nathan Slaughter likes to point out, this acts to increase earnings per share (EPS) and often increases the value of the outstanding shares.

I look at these programs as a vote of confidence by management. It's a clear sign that the company views its own shares as being undervalued -- and therefore a solid investment.

According to "The Harriman House Book of Investing Rules," companies that initiate stock repurchase programs have outperformed the overall market over the past 50 years: "A major study of the U.S. stock market over a 10-year period of time found that in each four-year period, value buyback stocks (buyback stocks with high book-to-market ratios) generated returns 45% higher than other stocks."

Technically, HOG has been trending higher since the first week in August. Using the 50-day simple moving average as support, every pullback to the 50-day single moving average has been bought, pushing the price higher. Right now, another pullback has occurred, creating the ideal entry level between $67 and $68.

Risks to Consider: Harley-Davidson, being a high-end motorcycle manufacturer, is very dependent on overall economic growth to continue to drive sales. Customers need to feel confident about the future to invest and enjoy recreational motorcycling. In addition, Harley faces competitive challenges from Indian Motorcycle, which targets similar demographics. Always use stop-loss orders and diversify when investing.

Action to Take --> Harley-Davidson is a rare breed of stock -- one that controls costs, raises dividends and buys back its own stock generously. With that said, I have great confidence in the future of this company. Buying pullbacks in the upward price trend makes good sense right now. The price is currently in one of these pullback modes to the 50-day simple moving average. Buying between $67 and $68 with stops at $65 and a 12-month target price of $80 makes solid investing sense.

P.S. I mentioned earlier that my colleague Nathan Slaughter likes companies like Harley-Davidson -- ones that pay rising dividends, slash debt and buy back shares. In fact, Nathan is putting the finishing touches on a special report about stocks like these -- which are often the absolute best-performing stocks over the long term. To reserve your free copy of this step-by-step guide, click here.

 

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.