Harley-Davidson: Earnings Call Notables

Harley Davidson (HOG) gave more insight into the primary reason earnings are dropping in the earnings call.

Financial Services:

Harley-Davidson Financial Services delivered first quarter operating income of $34.9 million a decrease of $24 million or 40.8% compared to last year’s first quarter. This decrease is primarily due in a reduction in income from securitization. As most of you are aware the first quarter was a challenging time in the securitization markets. In the first quarter of 2007 HDFS sold $540 million of retail motorcycle loans. As part of the transaction HDFS retained $54 million of the subordinated securities on its balance sheet and recognized a loss totaling $5.4 million. This compares to an $800 million securitization transaction with a gain of $13 million during last year’s first quarter. The loss in the first quarter of 2008 was driven by increased securitization funding costs due to capital market volatility and expectation of higher credit losses compared to historical trends."

"HDFS originated $518 million in retail motorcycle loans in the first quarter of 2008 compared to $630 million in the first quarter of 2007."

"In terms of credit performance the 30 plus day delinquency rate for managed retail motorcycle loans was 4.78% at the end of the first quarter of 2008 compared to 4.08% at the end of the first quarter of 2007. Consistent with seasonal trends over the past several years’ delinquencies declined from the fourth quarter of 2007 to the first quarter of 2008 and credit losses on managed retail motorcycle loans were 2.71% for the first quarter of 2008 compared to 2.28% for the same period last year."

"During the quarter the percentage of subprime loans outstanding remain within our historical growth range of 25 to 30% of managed retail loan receivables."

Pretty straightforward stuff. Delinquencies have risen but not by any means at an alarming rate. The real problem is the ability for HOG to sell the loans at a profit. This is not any different than any other firm trying to sell securitized loans.

The key is that they are not having any problems funding additional loans and are not being forced to hold more than they want...

This will just take some time.

Disclosure: Author is long HOG

Comments

[loonsong]

Good analysis, Todd.
Not everyone can tolerate the "time" it takes for things to improve, but for those who can, HOG is an excellent investment.
loonsong

[Mallarde]

I think Todd said "2007" once when he meant "2008."

I have not listened to the conference call, but I would not be so excited about what I read above. (I am a slight HOG short at these levels.)

So they securitized and sold about $300M less than in Q1 2007? They were forced to retain $54M of these securitized loans on their own books because no one would buy them?

And about 1 out of 20 borrowers defaults on the loans? 25 to 30-percent of loans on their books are subprime loans?

[Mallarde]

Another thought on overseas sales. Yes, this is their one growth area, and, ostensibly, could be a big bright spot for the company. But what other brands that are American icons survive as an export market product? This is sort of what happened to Levi's, IMO. The brand became passe in the U.S., but cool overseas. That situation cannot endure because the brand's U.S. status catches up with it.

I see lots of big question marks with this company. I find the argument of "this is a good company and will always come back" unconvincing and not worthy of an investor. It reminds me of what people kept saying about a stock with ticker symbol CSCO about 8 years ago. (Not saying HOG was a bubble stock in the same way, but you get the idea.)

[Amidwesternneighbor]

Phenomenal entry point right now, IMO. They've taken the measures to reduce costs and cut production for the duration of the slowdown. I'm happy to sit on that 3% dividend for now. When the U.S. economy comes back, HOG at $37 will have been a steal. I just initiated a position.