Harley-Davidson, Inc. (NYSE:HOG) and Thor Industries, Inc. (NYSE:THO) are the two most active stocks in the Recreational Vehicles industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect HOG to grow earnings at a 8.00% annual rate over the next 5 years. Comparatively, THO is expected to grow at a 4.20% annual rate. All else equal, HOG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Harley-Davidson, Inc. (HOG) has an EBITDA margin of 16.73%, compared to an EBITDA margin of 9.19% for Thor Industries, Inc. (THO). This suggests that HOG underlying business is more profitable. HOG’s ROI is 8.20% while THO has a ROI of 21.70%. The interpretation is that THO’s business generates a higher return on investment than HOG’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. HOG’s free cash flow (“FCF”) per share for the trailing twelve months was +2.04. Comparatively, THO’s free cash flow per share was +3.48. On a percent-of-sales basis, HOG’s free cash flow was 5.8% while THO converted 2.53% of its revenues into cash flow. This means that, for a given level of sales, HOG is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. HOG has a current ratio of 1.30 compared to 1.50 for THO. This means that THO can more easily cover its most immediate liabilities over the next twelve months. HOG’s debt-to-equity ratio is 3.51 versus a D/E of 0.09 for THO. HOG is therefore the more solvent of the two companies, and has lower financial risk.
HOG trades at a forward P/E of 12.49, a P/B of 3.99, and a P/S of 1.44, compared to a forward P/E of 14.39, a P/B of 4.24, and a P/S of 0.90 for THO. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. HOG is currently priced at a -7.45% to its one-year price target of $50.62. Comparatively, THO is -6.05% relative to its price target of $135.30. This suggests that HOG is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.80 for HOG and 1.60 for THO, which implies that analysts are more bullish on the outlook for HOG.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. HOG has a beta of 0.86 and THO’s beta is 1.35. HOG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. HOG has a short ratio of 10.07 compared to a short interest of 5.46 for THO. This implies that the market is currently less bearish on the outlook for THO.
Thor Industries, Inc. (NYSE:THO) beats Harley-Davidson, Inc. (NYSE:HOG) on a total of 7 of the 14 factors compared between the two stocks. THO is growing fastly, has higher cash flow per share, higher liquidity and has lower financial risk. Finally, THO has better sentiment signals based on short interest.