Harley-Davidson in the Mire and Likely to Stay There 52 comments
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Last week, Harley-Davidson (HOG) reported earnings (see conference call transcript here). U.S. retail sales fell 35%. International sales fell just 18% as HOG was aggressively pursuing sales in Latin America, Europe, and China. This translated into a 91% decrease in profit year over year.
The major solace HOG can derive from these numbers is that overall motorcycle sales decreased 48% in the U.S. In other words, HOG picked up market share. HOG’s market share in Q2 2009 was 51.5%, an increase of 10.3% over last year’s Q2. The increased market share was really the only bright spot in HOG’s report.
HOG also mentioned some restructuring. This has a lost of associated costs. HOG is expecting to spend $160M to $190M on restructuring over the next two years. HOG is expecting to incur $130M to $150M of that this year.
Eventually HOG expects this to lead to cost savings of $140M to $150M per year. As part of this, HOG announced further layoffs of about 1000 employees (300 salaried and 700 hourly). These layoffs are on top of the 1400 to 1500 already announced. I’m sure these are all painful, necessary, and good management moves.
However, they likely do not tell the story of what will happen with HOG.
What is going on in HDFS may be more indicative. The delinquency rate increased from 4.65% in Q2 2008 to 4.97% in Q2 2009. The annualized credit losses for H1 2009 were 2.69% vs. 2.14% in 2008. There was higher frequency of loss and higher average loss (due to the decline in the value of repo’s). The increasing unemployment in 2H 2009 means that these losses will get worse.
Gross Margin was 33.5%, which was down from 35.7% in Q2 2008. Operating Margin was 14.5%, which was down from 20.1% in Q2 2008. HOG’s guidance is for FY Gross Margins to be 30.5% to 31.5% (or a median of 31%). By my math this means Gross Margins will be approximately 28.5% in 2H 2009.
HOG’s situation starts to look uglier when you consider this. It makes me think that HOG may very well lose money in 2H 2009 (based mostly on margins). HOG actually had an Operating Loss in Q2 of $37.1M vs. a profit of $62.1M a year ago. HOG losing money is even more likely, when you consider HOG cut its shipping guidance by 25% to 30% for FY2009 (from 2008 numbers).
The above is not the only way HOG may lose money though. HOG (HDFS) used to have its receivables listed as assets held for sale. It was not able to sell these in today’s tighter credit markets. It instead converted them for accounting purposes to assets held for investment.
This means that HOG will now be much more likely to incur losses on these now riskier debts. These total $5.12B, and they are growing. HOG will also now have to set aside reserves to cover the likely percentage of bad debts. It is no wonder that Fitch recently downgraded HOG’s debt from A- to BBB+.
On top of this HOG is having trouble getting the money to lend for these loans now. It has secured the approximately $1B it needs for the near term, but it is unclear what will happen by this time next year, when the unemployment rate is still high. Credit for HDFS may be still harder to get by that time.
Many people worried that HOG would not be able to manage to get the money it needed for this year. HOG stands a chance of literally going under. HOG is dependent on its credit arm to lend people the money to buy its product. There will be many fewer buyers without an effective HDFS.
People should not dismiss HOG’s troubles out of hand by saying the good times are coming back. They should not point at the increased market share with glee. This may be a very slow recovery. Companies in HOG’s situation may die very slow deaths.
If you want to be tortured along with HOG, buy the stock. Otherwise I would avoid it.
HOG is wallowing in slimy, slop. It cannot get its footing. Its retail arm is bleeding. Its credit arm may go under. It may be gaining market share, but it is doing it at the cost of the cache of its name and its actual margins. It is selling more of its cheaper, lower margin motorcycles. This migration of the product mix will be hard to undo. The bigger emphasis on the cheaper motorcycles will tend to destroy the very differences HOG has sought to emphasize in order to differentiate itself from its competition. It may gain market share short term, but the strategy is likely a loser longer term. People will see the lack of differentiation. They will begin to buy still cheaper competitor models in time.
Let’s take a quick look at the numbers. HOG only earned $.08/share in Q2. It is predicted to earn $.23 and -$.12 in the two subsequent quarters. HOG is predicted to earn $.68/share for FY 2009 and $1.31 for FY 2010 (this last is down from $1.74 just 3 months ago). These numbers translate into PE’s of $19.98/$.68 = 29.4 for FY 2009 and $19.98/$1.31 = 15.3 for FY 2010. In this market, HOG should not be trading at more than 15 times 2009 earnings.
The outlook is negative for sales, for margins, for credit, for earnings, and for employment. If the credit card issuers are supposed to do badly over the next two years, HDFS will do badly. If the auto credit companies are supposed to do badly over that time. HDFS will do badly. HOG is likely at least two years away from seeing much improvement.
Instead, virtually every earnings estimate revision for HOG lately has been negative. It is not beyond the realm of possibility that the currently predicted near term 30 PE for 2009 for HOG could turn into negative earnings. It is unclear at this time how high the predicted PE for 2010 will end up going in actuality.
However, it seems clear from the analyst revision trends that the 2010 PE will be much higher than predicted currently. Why would you want to buy this stock now? Wait until it actually starts to show some signs of turning around. Laying off people in a bad market may be a sign that management is taking the corrective action it should, but it is not a sign of a turnaround. HOGs are gas guzzlers. It could be that gas savings will be a new and powerful trend in two years. It could be that HOG will never fully come back from this downturn.
The unemployment rate is predicted to be above 10% through 2010. HOG, credit card issuers, auto finance units, and automakers will all continue to have problems under these conditions. You can’t see the light at the end of the tunnel for this stock yet. Wait until you do (if it ever comes). The short interest in this stock is already 18%. It is not a buy. With the Fitch downgrade, there should be minimal chance for a short squeeze. Wait on this stock, or short it.
Let’s take a quick look at the technical side of this stock. HOG appeared in Bespoke’s list of stocks that were farthest from their 50-day moving averages. This means that it is likely this stock is over bought. Many other technical indicators give this same indication. These include Bollinger Bands, Stochastics, Williams %R, and RSI.
The only contrary indicator that I looked at was the Money Flow Index. It still looks like money is flowing into the stock. You may wish to wait for a more definite downturn to pick your entry point for a short.
Disclosure: I have a small short position in HOG.
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If David Kiley is even close to correct, HOG will be in deep financial trouble too.
The same would be true of HDFS (HOG's finance arm), except the amounts would be proportionately smaller.
7% owned by insiders. This probably
explains why HOG shares are, in general,
not available to sell short for retail investors.
At the same time that HOG shares have
ramped up, even after their credit rating
was downgraded by Moody's and Fitch,
and their earnings were actually below
estimates..., the short interest has actually
increased each day recently. So it goes
without saying that the short interest, and
the recent increased short interest of several million shares, has always been
held by institutions or hedge funds. So
while analysts and GS talk up the potential
of HOG shares, with the other hand short
interest remains high and increases. My
experience in situations like this tends to
make me look for, and expect, a secondary
offering by the company to raise cash to
be used for 'general corporate purposes',
along with a possible dividend cut or elimination. All signs point to a big take down in HOG's stock price coming soon
based on news of a big secondary offering,
or elimination of the dividend until sales
and revenues improve. A firm handling the
secondary, GS?, often helps to run up the stock price, and then the secondary offering
receives better pricing - just below the ramped up higher stock price. The loss on
shares purchased by the book running firm, and their cronies, is reduced when sales sold short are covered - just after the secondary is announced. Then not too long
after the successful secondary is completed
the dividend may also be reduced or suspended. The recent, totally unjustified, move of the HOG share price from $15 to
Friday's closing price of $22.60 looks to be
a set up for a big take down on news that will soon be announced. At the same time,
it appears to be the case that analysts that would normally issue downgrades, and cut
earnings estimates, have been muzzeled
until after the dirty deeds have been done.
But this HOG share ramp-up-fiasco is par
for the course, and isn't unusual in this scam and bogus-stock-manipulation environment. HOG is the ultimate consumer
discretionary stock, and the consumer is
going to stay tapped out for a very long
time as unemployment continues to rise
into 2010. The high short interest and high put to call ratio on HOG shares exists for a
reason; soon we're likely to find out why.
HOG shares are richly valued even at $18,
and a short squeeze to take the share price
higher isn't likely because retail investors
really aren't involved. Institutions and brokerage firms are playing an inside game
by their own rules while some of the trades
are also probably hidden in dark trading pools. Based on actual and expected earnings, the HOG share price now represents a sham and common Wall Street scam. Good Luck.
seekingalpha.com/artic...
HOG short interest is 19.47% of the float. GMCR short interest is 33.65% of the float. MAR short interest is 12.64% of the float. This SEC factor may provide some short term distortions of what one might normally expect from the stocks performances. Longer term it likely won't matter.
Supporting Dr. Roubini's thesis, Paul Krugman, a Nobel Laureate economist, is now saying that the world needs a second stimulus to avoid a lost decade (such as Japan's of the 1990's).
Notably both the US Congress and President Obama have said they have no plans for a further stimulus at this time. Obama insists that the current stimulus will start to be felt more as time goes on.
Congress does keep approving more money for things like cash for clunkers. However, this doesn't really help HOG. This program applies only to cars.
One thing that is underplayed in all the comments above is the demographic time bomb HOG faces. I have been riding motorcycles for 10 years and am in my late-30s. HOG has some real, real problems in its core fans becoming too old to ride their big clunkers, er, motorcycles.
I liked this as a short better at $40, but I'll take it in the mid-$20s.
Good to see you back.
Agree with your assessment and would add that Harley-Davidson faces far greater challenges to its future sales.
Followed the stock down to eleven and stepped back. Have for some time looked at its true value to be around its hundred day plus avg.
Too bad I lost all my money betting that Wachovia would be rescued. Another lesson. Nothing looks safer right now than hedging my dead in the water mutual funds by shorting HOG here.
On Aug 11 02:24 PM FUJIMO wrote:
> mallarde:
> Good to see you back.
>
> Agree with your assessment and would add that Harley-Davidson
> faces far greater challenges to its future sales.
> Followed the stock down to eleven and stepped back. Have for some
> time looked at its true value to be around its hundred day plus avg.
The trend is not going to appeal to the bulls in the near future..
Prime selling of inventory is over "summer months" and third QTR profits are going to be very slim.
Every indication is that the sportster program has failed acording to several dealers being forced to load up on this model. Sales are slow as we know.
The Co is leveraged to the nines. What's left ?
I find it interesting that cutting overhead is an open door for investors with a discretionary type buisness that shows little promise for many months to come.
So much of your statement is out of context.
What is your point?
My take is that you are not among the 60% college educated, high income owner of a Harley Davidson with little or no knowledge of Harley Davidson true history. Just a tattoo guy with a miniscule profile.
These are not my words but words that should not go un-noticed.
Unless Harley-Davidson connects with a new generation, It will die along with the old. [ riders ] That means not only offering products that appeal to a more youthful demographic, but marketing them to more discriminating minds. The younger riders of the Internet era are web-wired and world-aware. That makes them less likely to need or even accept “reasons to ride” [ spoon-fed to them by H-D corporate’s entertainment marketing ], and more likely to respond to initiatives evidencing [ corporate social responsibility.]
At second glance this does not appear to be such a big winner. The Indian government will charge HOG a 105% duty on all motorcycles. Plus there will be start up costs, etc. The average motorcycle sold in India sells for approx. $1227. With the 105% duty, a cheap HOG will sell for $14,000+. The custom bikes start at $25,000+ in the US. That will make them over $50,000 in India. Some may range up to $100,000 or more. Isn't that an enticing thought.
If all that's not bad enough, other manufacturers such as Honda have many fewer mechanical problems over their lifetimes. They are cheaper and easier to repair. It's hard to justify buying a HOG in the US. If you were paying 105% more for your HOG, you would really think twice. This plan seems like a dud from the word go, unless HOG can get India to drop the duty charges. When and if India does this, I will then consider the possibilities India sales may accrue. Even without the duty, HOG's are still much more expensive than the average motorcycle sold in India. New CEO's are always out to show up the last guy. The words flow through their lips like honey. Frequently the profits do not. This seems likely to be one of those cases.
And the statement about web-conscious and Earth-friendly youth resonated with me. Rather than thinking they look tough and cool on a HOG, youth would think they are defeating the whole "green" appeal of motorcycles by riding an overweight and inefficient pig of a bike. How impractical. Worse mileage than green cars? Why risk life and limb? To look good? To look good to whom? Your 60-year-old orthodontist?
This company still has not figured out a way out of the corner it finds itself in. It's whole cache is in the past -- clinging to an obsolete engine. It now must face the music or figure a way out.
What appeals to me as a short-sider if that the financial world seems to know so little about the many market segments that make up the motorcycle world. Most Americans are deluded and think that everyone wants a HOG. Not so at all.
Well-known brands die all the time with passing generations. When is the last time anyone put Brylcreem in their hair?
Does this sound like the same old fox in the hen house?
At this point in time I see India as a dumping depot for the Harley
The Sportster model which was a bust here in the US, with the "Harley-Davidsons Guaranteed Trade-In Value For Sportsters" towards an upgrade.
Harley has already established a subsidiary outside Delhi.
Are units delivered counted as units sold when they reach India soil? Similar to US dealer network, even though a sale to private individuals have not transpired
I suspect that they are really hoping that there are 100,00+ millionaires in India that would like a very unique and American status symbol. A replacement for their core marker? C'mon, that is ridiculous. HOG can't survive by selling Americana in Asia.