Recommendation. P/Book 2.66 Div Yield 1.6% Profitability & Effectiveness ROE 13.14% Debt/Equity 2.67 Profit Margin 5.69%

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1 Ticker: HOG Sector: Consumer Cyclical Industry: Recreational Product Recommendation: BUY Pricing Closing Price $23.61 (7/19/10) 52-wk High $ wk Low $18.43 Market Data Market Cap $5.56B Trading Vol Mil. Total assets $2.308B Total Liabilities $2.308B Valuation (1Q 2010) EPS.14 P/E N/A P/Book 2.66 Div Yield 1.6% Profitability & Effectiveness ROE 13.14% Debt/Equity 2.67 Profit Margin 5.69% Corporate Information CEO Keith E. Wandell Auditors Ernst & Young Opinion Unqualified Employees 7,300 Analyst: Doug Wood Recommendation Harley Davidson is one of the more unique companies that we have the opportunity to invest in. They no doubt offer a luxury product that is dependent on consumers disposable income and preferences. However, They possess a global brand highly recognizable across the world. Additionally they have built a strong consumer culture that continues to deliver repeat business from current owners. The company s increasing focus on new growth in the under 35 demographic in addition to female customers is encouraging for future performance. Despite poor sales revenue and net income in 2008 and 2009 I feel this company provides our portfolio with an opportunity to experience strong returns in the coming years as the job market strengthens and the recession alleviates. Strong second quarter earnings for 2010 have indicated Harley Davidson is ready to return to pre recession form and potentially surpass historical numbers. I recommend purchasing 100 shares of Harley Davidson, however, I encourage you to voice your opinion on this amount.

2 Company Description Harley-Davidson, Inc., incorporated in 1981, operates in two business segments: the Motorcycles & Related Products segment and the Financial Services segment. The Motorcycles segment designs, manufactures and sells at wholesale primarily heavyweight touring, custom and performance motorcycles, as well as a line of motorcycle parts, accessories, general merchandise and related services. The Financial Services segment consists of Harley-Davidson Financial Services (HDFS). HDFS provides wholesale and retail financing and, as an agent, provides insurance and insurance-related programs primarily to Harley-Davidson Motor Company dealers and their retail customers. HDFS conducts business principally in the United States and Canada. Motorcycles & Related Products Operations The primary business of the motorcycles segment is to design and manufacture motorcycles for the heavyweight market and sell them at wholesale. The Company manufactures five families of motorcycles: Touring, Dyna, Softail, Sportster and VRSC. The Company s worldwide motorcycle sales generated approximately 75 percent of the total net revenue in the motorcycles segment during the year ended December 31, The total motorcycle market, including the heavyweight portion of the market, comprises four segments: standard, performance, custom and touring. The touring segment includes the Harley-Davidson Touring family of motorcycles, which are equipped with fairings, windshields, saddlebags and luggage carriers. The custom segment of the market includes motorcycles featuring the distinctive styling associated with classic Harley-Davidson motorcycles and includes the Company s Dyna, Softail and VRSC motorcycle families, as well as a portion of the motorcycles in the Sportster family. The Company s Sportster family also serves the standard segment of the market. The Parts and Accessories products comprises of replacement parts (Genuine Motor Parts) and mechanical, and cosmetic accessories (Genuine Motor Accessories). Worldwide P&A net revenue comprised 17.9 percent of net revenue in the motorcycles segment, in Worldwide General Merchandise net revenue, which includes revenue from Motor Clothes apparel and accessories, comprised 6.6 percent of net revenue in the Motorcycles segment, in The Company s licensed products include t-shirts, vehicle and vehicle accessories, jewelry, small leather goods, toys and other products. During 2009, the Company shipped 223,023 Harley-Davidson motorcycles, a decrease of 80,456 motorcycles, or 26.5%, from last year. The Company s shipments in the U.S. in 2009 continued to be negatively impacted by the challenging economic environment. On January 22, 2010, the Company announced that it expects full year 2010 shipments of Harley-Davidson motorcycle units to be 201,000 to 212,000. This represents a 5% to 10% reduction from 2009 shipments as a result of two key factors. First, the Company expects global economies to remain challenging, specifically in the U.S. with continued high unemployment and low consumer confidence. Second, the Company expects

3 continued price competition from other manufacturers as they reduce excess inventories, in particular, old model year motorcycles Financial Services HDFS is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans, primarily for the purchase of Harley-Davidson motorcycles. In addition, HDFS is an agent for certain unaffiliated insurance carriers providing property/casualty insurance and also sells extended service contracts, gap coverage and debt protection products to motorcycle owners. HDFS conducts business in the United States and Canada. HDFS provides retail financing to consumers, including installment lending for the purchase of new and used Harley-Davidson and Buell motorcycles. HDFS retail financial services are available through most Harley-Davidson motorcycle dealers in the United States and Canada. The recession forces a new focus On October 15 th 2009 newly elected CEO Keith Wandell revealed a new corporate longterm strategy that aimed to address Harley Davidson s struggling operations amidst the recession. The plan addressed a four-step process aimed at improving revenue through improved cost cutting strategies and an increase in market growth through a strengthened brand. Customer & Brand Growth Young adults, those under age 35, hold the HD brand in virtually the same high esteem as long-time customers. For the new generation, Harley has created motorcycles, experiences and entire communities, both real world and virtual, to immerse them in the brand, expand their universe of enthusiasts and make them customers for life. Bikes like the Iron 883,one of their best selling introductory level motorcycles in 2009, have done exceedingly well among young adults.

4 Harley s Rider s Edge New Rider Course is instrumental in growing new relationships, helping more than 200,000 students take to the streets with confidence since percent of them are under age 35 and 37 percent are women. They continue to introduce themselves to prospective customers through venues like the South By Southwest music and culture festival, online communities, and Garage Party events just for women. The Harley-Davidson brand has remarkable global strength. Their motorcycles now roll out of dealerships in more than 70 countries on six continents. By 2014, plans call for international retail sales of Harley-Davidson motorcycles to exceed 40 percent of total retail unit sales. Europe continues to be a prime Harley- Davidson destination, fueling the demand in more mature international motorcycle markets. HD is a major player in Europe, climbing into the number three spot in the heavyweight segment in 2009 with a market share that s double what it was a decade ago. Cutting Costs Revenue from sales of Harley-Davidson motorcycles decreased to $3.17 billion in 2009, a decline of 25.2 percent from 2008, on a 26.5 percent reduction in shipments of Harley- Davidson motorcycles. Revenue from Genuine Parts and Accessories in 2009 totaled $767.3 million; a 10.7 percent decrease from the previous year, and General Merchandise revenue was $282.2 million, a decrease of 10.1 percent compared to During 2009, Harley-Davidson took actions to lower its cost structure through eliminating excess capacity, reducing administrative costs and exiting non-core business operations. Consequently, 2009 results were significantly affected by non-recurring charges. Harley-Davidson expects restructuring activities announced in 2009 to deliver between $240 million and $260 million in annual ongoing savings upon completion of those restructuring activities.

5 The HD will discontinue production of Buell motorcycles, a subsidiary company of HD that specializes in production and sales of sport and racing motorcycles. Remaining inventories of Buell motorcycles, accessories and apparel, while they last, will continue to be sold through authorized dealerships. Warranty coverage will continue as normal for Buell motorcycles and the Company will provide replacement parts and service through dealerships. Harley-Davidson expects to incur approximately $125 million in one-time costs related to the discontinuation of the Buell product line. The Company incurred approximately $115 million of that amount in HD will also be dumping its relatively recent interest in MV Agusta, which is based in Varese, Italy. In the third quarter 2009, Harley-Davidson recorded a one-time fixed-asset impairment charge of $14.2 million related to Buell and a goodwill impairment charge of $18.9 million related to MV Agusta. Significant Risk Factors Reliance on independent distributors and dealers The Harley Davidson depends on the capability of its independent dealers and distributors to develop and implement effective retail sales plans to create demand among retail purchasers for the motorcycles and related products and services that the dealers and distributors purchase from the Company. If the Company s independent dealers and distributors are not successful, then HD will be unable to maintain or grow its revenues and meet its financial expectations. The Harley Davidson may experience a further decline in retail sales resulting from general economic conditions and tightening of credit. The motorcycle industry has been affected by general economic conditions over which motorcycle manufacturers have little control. These factors have caused a weaker retail environment leading to weaker demand for purchases, and the decision to purchase a motorcycle has been and may continue to be affected by these factors. The related tightening of credit has led to more limited availability of funds from financial institutions and other lenders and sources of capital which has negatively affected and could continue to adversely affect the ability of retail consumers to obtain loans for the purchase of motorcycles from lenders, including HDFS

6 Competition Many of HD s competitors are more diversified than them, and they may compete in the automotive market or all segments of the motorcycle market. Also, HD s manufacturer s suggested retail price for its motorcycles is generally higher than its competitors, and if price becomes a more important competitive factor for consumers in the heavyweight motorcycle market, HD may be at a competitive disadvantage Continued growth of the Harley Davidson Brand The Harley-Davidson brand has significantly contributed to the success of HD s business and that maintaining and enhancing the brand is critical to expanding its customer base. Failure to protect the brand from infringers or to grow the value of the Harley-Davidson brand may have a material adverse effect on the Company s business and results of operations. Industry For 2009, the data shows that of approximately 304,000 new registrations of U.S. heavyweight motorcycles, about 53 percent were Harley-Davidson brand bikes. Other motorcycle brands being sold in the U.S. heavyweight market include Honda, Suzuki, and Yamaha. Heavyweight motorcycles sold in the U.S. represent a relatively small percentage of worldwide unit sales of motorbikes, which include smaller or less-powerful machines that may be referred to as motor scooters. Factors that are likely to affect motorcycle sales are personal income and spending levels, consumer confidence, levels of unemployment, demographics, and the amount of free time people have available. S & P expects that an aging population, and the impact that this has on consumer demand, will limit opportunities for industry sales growth. In the U.S., it is believed that efforts will increase to encourage the number of female motorcycle riders. Harley is considered by many analysts to be in its own subsector of the of the consumer recreational vehicles due to its unique culture and high end products. Over the past two years HD has been severely hit more so than others in the recreational industry. Performance in this industry is directly correlated to consumer disposable income and credit availability.

7 Harley s performance over the past 5 years relative to the S&P 500 Competitive Comparison Revenues Operating Margin Profit Margin NI ROA ROE Return On capital Mkt Cap Harley Davidson 4.78 B 9.38% (55.12 M) -0.65% -2.61% -0.68% 5.56 B Brunswick 2.78 B % (586.2 M) 19.76% % N.A B Polaris 1.57 B 10.54% M 13.34% 59.15% 27.99% 1.99 B Carnival B 16.37% B 5.10% 8.70% 7.16% 26.1 B 2009 Competitive Comparison relative to others in the consumer goods industry Harley Davidson is not the only company to struggle relative to the industry. Brunswick Corporation, a manufacturer of pool tables and other game tables has felt the impact from constricted consumer spending. However, Polaris, a motor sports manufacturer, and Carnival cruise lines have managed to do fairly well with return on capital of 28 percent and seven percent respectfully. This competitive chart is a good indication of how volatile the industry is that HD is in, revenues highly depend on how the consumer chooses to spend their money and the amount they are willing to spend on certain luxury goods.

8 Valuation To calculate a reasonable estimate of Harley Davidson Inc s intrinsic value, I used the Owners Earnings Model. I calculated CAPM using Bloomberg s 10-year raw beta estimate of HD to equal Using the risk free rate of three percent and an expected market return of 11 percent, the discount rate is calculated: K = ( ) K = 16.52% Harley Davidson took a hit in sales of nearly 26 percent in 2009 due to restricted disposable income and high unemployment rates. Concluding from strong first and second quarter earnings in 2010 I estimated sales growth to jump heavily by 17 percent, 2011 growth to recapture the remaining loss with 15 percent, and 2012 growth to be six percent. I followed a conservative growth rate for 2013 and beyond with seven percent and increasing to 7.5 percent after 2014 due to unforeseen economic conditions and restraints on consumer spending. However, I feel this growth rate is realistic considering Harley Davidson s new corporate cost structure and their ability to expand on an extremely strong and recognizable brand My intrinsic value for Harley Davidson using the Discounted Cash Flow model is: $ compared with a trading value of $23.61 on 7/19/10 Historical 5-year stock price

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