This week I was fortunate enough to undertake a physical site tour of the Harley Davidson (HOG) Operations Facility in York, PA. The opportunity to visit corporate entities operations on site provides a unique insight into the way which management is using resources to achieve value in the company's bottom line. I will use this article to highlight the observations I made, and their contribution to the intrinsic value of HOG.
Harley Davidson is the brand name of the American motorcycle manufacturer which has been producing bikes since 1903. It's ticker symbol HOG is both representative of an equity buyback of the company in 1981 (following its merger with the American Machine and Foundry Company in 1969) by the Harley Davidson Owners Group, as well as being an affectionate term of the bikes by their owners. The company was listed on the New York Stock Exchange in 1987.
Harley-Davidson, Inc. is the parent company for the group of companies doing business as Harley-Davidson Motor Company and Harley-Davidson Financial Services. Harley-Davidson Motor Company, the only major U.S.-based motorcycle manufacturer, produces heavyweight motorcycles and a complete line of motorcycle parts, accessories and general merchandise. Harley-Davidson Financial Services provides motorcycle financing to Harley-Davidson dealers and customers in the U.S. and Canada.
The company operates four key operational plants in the U.S. producing bikes for domestic sale, and it exports globally, with its biggest export sales to Australia, New Zealand and Japan. Vehicle Operations is located in York, PA, and produces touring bikes and the Softtail. Vehicle and Powertrain Modules in Kansas City, MS, and produces the Dyna, Sportster and VRSC models. Tomohawk Operations in Tomohawk, WI, manufactures saddlebags, fiber glass and accessories, as well as custom paint jobs. Menomonee Falls, WI, is the fourth hub which produces the heart of the HOG, the famous "Big Twin" engines. On the corporate side of the enterprise, the company is headquartered in Milwaukee, WI.
As I stated, I was lucky to visit the new Operations Facility in York, PA. This is a brand new, state of the art facility which is a blend of automated and manual production techniques. The automation aspect reduces costs, and the workers provide the "soul" of the production, and seem to be as much a part of the bikes as the bikes are of them. The tour of the facility covers the manufacturing process of the fenders, gas tanks and the bike frames themselves - with robotic welding and pressing machines producing high quality work that is reviewed and assessed by master craftsmen in their trade. The level of quality control the company prides its product on is first seen here, and continues through every step of the production process. The components manufactured are also primed, painted and finished, prior to going onto the production line.
In terms of its automation and supply chain processes, the bikes as they are assembled traverse through the facility on self guided trolleys, following magnetic directional strips. A clever design component of these trolleys is the adjustable height function which raises the bike to the required working height depending on the tasks being undertaken. Computer sensors and scanners identify the information related to each model as it moves through the production process, documenting every step made in the bike's assembly, and recording any deviations from standard.
It is apparent that management values the workers, and has employed some simple techniques to gain better utilization, and ultimately better productivity. The workers are arranged in small teams of six to eight personnel under a supervisor, and they meet daily to discuss production run progress and ideas for improvement, which allows ideas at the factory floor level to be quickly listened to and acted upon as required. One example evident during the tour, was the employment (as standard) of a jig designed by one of the workers to assist with a particular assembly technique. The result, a new process acted upon and adopted within two days, which not only improves the production process, but improves the OH&S aspects of this particular task.
The last component which deserves comment is the rolling assembly and audit process Harley Davidson employs. All bikes are taken through the rolling assembly test line and checked by man and machine to ensure the bikes meet up to the specifications demanded by Harley Davidson's reputation. Even more rigorous, is the random selection of bikes daily which are taken through a physical test ride and evaluation post ride to ensure the bikes coming off the production line are meeting all specifications. To observe this is to view a level of pride and quality control that is not done justice by words alone.
The level of automation appears balanced, with a mixture of robotic machines and trolleys working in tandem with highly skilled workers. The inflow of parts and assembled components is well controlled, and needs to be to satisfy the daily numbers of bikes rolling off the production line. The completed bikes after quality control and auditing are shipped out to a central facility, which then separates bikes for domestic sale and onward movement to dealerships, to those for export which move to Baltimore, MD, for surface export.
The company pays a consistent dividend, which appears to be returning to a more healthy return for investors. It is clearly evident that the global financial crisis and the ongoing lingering recession in the U.S. is having a marked impact on domestic sales. That said, 2011 marked a noticeable increase for unit sales, with domestic sales up by 20,544 units (15.6%) and export sales up by 2,079 units (2.6%). While the increase in export sales is smaller, their level has been more stable, and more predictable for Harley Davidson in recent years. And in tough times, a little growth in business sales never hurt anyone.
A comprehensive look at unit sales for the company can be viewed below:
Click to enlarge
The stock closed $1.03 (2.25%) higher yesterday at $46.80. Key financials for HOG at present are as follows:
- 52 week high $47.19
- 52 week low $31.50 (August, 2011)
- EPS 2.55
- PE 17.90
- Div Rate 0.62
- Yield 1.3546
- Market Cap of 10.87 billion
The stock has climbed 33.7% for over the last three months, steadily trading up as can be seen by the graph below:
From what I have seen, it appears that operations and management of both the company and the product is working. Both Harley Davidson and HOG have a history of surviving some adverse economic challenges. In terms of its product, operations and quality control, the company has itself on the correct course. The challenge will be to sustain its recent gains, and rebuild its domestic sales as conditions improve in the U.S. But this is a time frame that will be in years not months, and every cost cutting measure and product/brand control that HOG has will be instrumental in achieving sustained growth, sales and profitability.
For investors with a reasonable appetite for risk and a desire for industrial stocks, I think HOG is a potential long term position play (3-5 years) that should reward on both capital growth and dividend returns. For the more conservative risk appetite, you could go and spend $10 - $15K and buy a HOG for yourself, and get an immediate return on investment.
Additional disclosure: This advice is general advice only. You should seek independent financial advice prior to making any investments of your own.