HOG Spends Yet Another Quarter at the Trough

Jul.17.09 | About: Harley-Davidson, Inc. (HOG)

We have a plethora of earnings reports, so we will have some guest posts coming later in the day to get through the multitude of names we want to cover. But first let's focus on Harley Davidson (NYSE:HOG) - a name I've been following the full 2 years in the blog as a tell on the "aspirational" middle to upper middle class American who has been using his house as an ATM to fund his toys. We've been bearish throughout, but since we were not able to short individual names with the older simulator we were using for tracking purposes we could only wave our arms in the air with multiple posts saying HOG will be a PIG. This was a quote from January 2008...

Talk about the prototypical company to short in this recessionary environment where the consumer is getting squeezed. I cannot short individual names, but there was a great opportunity to short this at $42 this morning (it's already down to $38). This is like the men's version of Coach (NYSE:COH) - any spike, it should be shorted. At least for another year. I can't think of another company that better represents the excesses of credit (house ATM, over spending) we've had over the past decade.

Unlike the flawed US government economic reports, these are the type of companies that will tell me if the US economy is at least stabilizing and or strengthening. When Joe 6 Pack is back buying Harleysto show off to his neighbors that he too has achieved the American dream... (on his way to Whole Foods Market) then the economy is "back".

That said, I almost bought this only for a very short term trade last week when it refused to fall below $15, but since the market has made such a strong move I got caught up in a lot of other transactions. I of course would have been out ahead of earnings, since (a) I don't play the earnings game and (b) I don't think the American consumer is coming back anytime soon. I wish I had taken the trade; although the speculators who jumped in yesterday probably don't wish that ... the stock is down 5% in premarket based on yet another disappointing earnings report. (actually I am surprised the stock is not up based on "hey it can't get worse than this!" logic that has been embedded by bulls for 18 months). Oh yes, after cutting many American heads ... more are coming... that's the way to profits as Wall Street celebrates. But give them credit, they are still profitable and workers are simply an excess cost. Hopefully more jobs can be cut next quarter! (green shoots)

EDIT 9:50 AM

See I was correct after all - the "hey it can't get worse than this" crowd is back... after dropping a few percentage points at the open, HOG is now up 7%! "this should be the trough quarter" that has been the rallying cry for 6 quarters now, is working again.

My thesis that Harleys are a big expensive toy that far fewer Americans can now afford has been correct throughout the 2 years as pundits talk about impending US consumer recovery. Until our government gives us our house ATM back (and boy are they trying with every handout possible) HOG won't be making any major comeback. They are best served to go to China like every other American company and hope they can brainwash those consumers into the need for big toys interlaced with American culture. Keep in mind, Harley has a hugely loyal fan base - they would spend if they COULD. But they can't - they are impaired; something the pundits still refuse to acknowledge 2 years into this crisis.

HOG is one of the tried and true names that funds jump into each time the "early cycle discretionary income" thesis is the play of the week... i.e. the economy is going to turn in 3-6 months, we must buy consumer discretionary. This trade has been attempted at least 6 times now since late 2007 and its been nothing but wrong; playing by an old playbook in a new normal. But they will keep trying it, because fund managers are hard wired.

2 mo chart

30 mo chart

So remember the playbook - cut expenses (read: humans), watch revenue fall off the map, try to get close to a very low expectation earnings number, and speak of "stabilization". Unfortunately for HOG, things are so weak they cannot even do the latter.

On to the earnings ... via AP

  • Harley-Davidson Inc. said Thursday it is cutting 1,000 more employees and lowering its motorcycle shipment guidance as quarterly earnings continued to fall due to weaker sales. The Milwaukee-based maker of the famous heavyweight motorcycles said it plans to cut another 700 hourly and 300 salaried employees from its ranks as it copes with falling demand for its high-end bikes.
  • Earlier this year, the company had said it planned to cut between 1,400 and 1,500 hourly positions and about 300 salaried positions.
  • "It is obviously a very tough environment for us right now, given the continued weak consumer spending in the overall economy for discretionary purchases," Harley-Davidson President and CEO Keith Wandell said in a statement.
  • Harley, the top seller of heavyweight motorcycles, said its second-quarter income fell 91 percent to $19.8 million, or 8 cents per share. That's down from $222.8 million, or 95 cents per share, in the same period last year.
  • Revenue declined 27 percent to $1.15 billion from $1.57 billion a year ago.
  • Analysts surveyed by Thomson Reuters forecast 24 cents per share on revenue of $1.15 billion.
  • Harley said its worldwide motorcycle sales fell 30 percent during the quarter. That was still better than the industrywide decline in heavyweight motorcycle sales of 48 percent. (cannot wait for the quarter where motorcycle sales only fall 26% - then we can tout "2nd derivative improvement" and shoot HOG stock up 20%)
  • Harley now expects to ship between 212,000 and 228,000 motorcycles to its dealers and distributors worldwide in 2009, down between 25 to 30 percent from 2008 shipments levels. Previously, the company expected to ship between 264,000 and 273,000 motorcycles. In the third quarter, it expects to ship between 52,000 and 57,000 bikes. (i.e. their already gloomy forecasts have to be ratcheted down YET again - but not to worry, some US government economic report is saying the US consumer is back)
  • It said Thursday it will implement production shutdowns at its York and Kansas City, Mo., production facilities, as well as at its powertrain operations at Menomonee Falls and Wauwatosa, Wis.
  • The company's financing arm, Harley-Davidson Financial Services, posted an operating loss of $62.1 million in the second quarter, down from operating income of $37.1 million a year ago. The tight credit markets have weighed on the unit, which has been heavily reliant on the battered securitization market for funding.

Full report found here

Apr 18, 2009: Fortune - Harley Davidson: Bull or Bear?]

[Mar 23, 2009: NYT - Harley Davidson - You're Not Getting Any Younger]

[Jan 9, 2009: Harley Davidson: "Oink"]

[Feb 3, 2009: Buffet Provides Financing to Harley Davidson]

[Feb 12, 2009: Harley Davidson Cuts Dividend to Protect Cash]

[Jan 25, 2008: I Can't Believe this Pig...err HOG was up Today]

[Sep 7, 2007: More Retail Tells? Harley Davidson and Office Depot]

Disclosure: No position