It's been a great afternoon session for Harley-Davidson investors, who saw their shares rise 9.7% to a price of $51.28 per share. At these higher prices, is the company still fairly valued? If you are thinking about investing, make sure to check the company's fundamentals before making a decision.
Harley-Davidson, Inc. manufactures and sells motorcycles. The company belongs to the Consumer Cyclical sector, which has an average price to earnings (P/E) ratio of 24.11 and an average price to book (P/B) ratio of 3.11. In contrast, Harley-Davidson has a trailing 12 month P/E ratio of 10.7 and a P/B ratio of 2.6.
P/B ratios are calculated by dividing the company's market value by its equity's book value. Equity refers to all of the company's assets minus its liabilities. Traditionally, a P/B ratio of around 1 shows that a company is fairly valued, but owing to consistently higher valuations in the modern era, investors generally compare against sector averages.
When we divide Harley-Davidson's P/E ratio by its expected five-year EPS growth rate, we obtain a PEG ratio of 0.23, which indicates that the market is undervaluing the company's projected growth (a PEG ratio of 1 indicates a fairly valued company). Your analysis of the stock shouldn't end here. Rather, a good PEG ratio should alert you that it may be worthwhile to take a closer look at the stock.
