Harley Davidson Executives, Investors Wear Generational Blinders

|
Includes: DIS, HOG
by: Beacon Asset Managers

Harley Davidson Inc. (NYSE:HOG) yesterday reported an 84 percent plunge in third-quarter profits and announced the dissolution of its Buell line of specialty sport motorcycles and the sale of its MV Agusta division in order to focus its resources on its namesake brand. Harley Davidson CEO Keith Wandell said the return from the sale of an MV Agusta or Buell is far less than the return the company gets from a Harley Davidson, and that “we’re going to be able to grow the company more quickly ... by investing in the power of the Harley Davidson brand.” According to the Wall Street Journal, Wandell admitted that both Buell and MV Agusta have a strong following, but that those divisions were “diverting investment dollars away from the Harley brand to support those brands.”

The shares rose almost 5 percent on the news, and were up another 3 percent in this morning’s trading, but we wonder if investors have considered how the company plans to generate these greater returns when the Baby Boomer generation that makes up the vast bulk of its customer base is rapidly aging out of the market, and the generations following do not seem to share the same affinity for the iconic brand.

On a price to sales and price to book ratio one can see from the chart below that Harley Davidson is back to the levels of the late 1980s. With the average age of a Harley owner at 47 years, the difference now is that unlike the period 1990 to 2002, the company is no longer mining the demographic growth market of the large Baby Boomer generation. So, not only is the company’s potential market base growing smaller due to the smaller size of the oncoming Generation X, its growing smaller because the oncoming market base has displayed little inkling that it even likes the product.
Click to enlarge
Source: Ned Davis Research

In short, we feel that the company is making a big mistake in divesting itself of two brands that have far more appeal to younger generations than the Harley Hogs, and that company executives, as well as investors, have blinders on with regard to the multi-generational earnings power–or lack thereof–of the Harley Davidson brand.

How many people under 40 do you know who own or want to own a Harley Davidson Motorcycle? We know of none, and an informal poll of friends and family turned up none, which is not saying a whole lot because the aforesaid informal poll certainly lacks statistical significance. However, anyone giving any consideration to investing in HOG should conduct their own informal poll because those 40-and-under-year-olds are Harley Davidson’s fast approaching future market, and early indications suggest this future market doesn’t give a fig about Harley Davidson. However, ask an under-40-year-old motorcycle rider if they’d like to own a Buell or an MV Agusta, and the response will likely be quite positive and in some cases may even induce a Pavlovian response.

The stock price action would suggest that we do not know what we are talking about; however, demographic change does not happen overnight, as it’s a relatively slow progression, kind of like the Harley riders of today slipping into old age and out of their Hogs and into golf carts and wheel chairs. As this comes to pass, Harley Davidson is going to see significant sales declines if the incoming and younger generations don’t buy into the Harley Davidson brand.

And Harley Davidson’s earlier success was built on a brand, the branding of the outlaw biker. In the 1960s and ‘70s the Harley Davidson logo was signature wear for the “Hells Angels,” other biker gangs, and bad-boy wannabes–relatively rare and thus “cool.” Today the logo seems almost ubiquitous on middle-aged and elderly bikers, who wear far more black leather and sport shinier chrome on their Harleys than any Hells Angel ever did. The once cool, outlaw-style logo has been homogenized, and is about as outlaw and cool as the Walt Disney (NYSE:DIS) logo.

Harley Davidson has been seeing significant sales declines since 2006, and the CEO reported that it will “bump along the bottom through 2010,” but suggested that the company’s “strategy,” cost-cutting efforts, and overseas opportunities position it for future growth.
We believe that a rebounding economy will help Harley Davidson for the short term, but feel that demographic headwinds will prove detrimental to the company’s long term future unless it accounts for the younger generations (please see our July 17 Seeking Alpha article). With the boot Harley is giving to Buell and MV Agusta it appears that executives aren’t giving full credence to younger generational tastes quite yet, but at least they still have a bit of hope with the V-Rod model.

Oh, and speaking of overseas opportunities, Harley Davidson executives believe that India and China represent great opportunities and plan to significantly boost the company’s presence in both countries. Let’s see, Harley Davidson primarily makes big, in many cases really big, production motorcycles. People in China, and even more so, India, on average are among the world’s shortest people. There’s just something not right about this picture.
Click to enlarge
Source: Wikinvest


Disclosure: No Positions.