Harley-Davidson: Better Off Investing Your Money In Its Bikes

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

Shares of Harley-Davidson (HOG) ended the week with losses of 5%. The motorcycle manufacturer reported slightly disappointing second-quarter results on Wednesday.

Second-Quarter Results

Harley-Davidson reported second-quarter revenue of $1.73 billion, compared with last year's revenue of $1.51 billion. Income from continuing operations came in at $247.3 million, or $1.07 per share. This compares with earnings of $0.81 last year.

The company sold 85,714 new Harley-Davidson motorcycles, up 2.8% compared with last year. Second-quarter sales were negatively impacted due to an unusually early spring in the U.S., which pulled sales forward into the first quarter.

CEO and Chairman Keith Wandell commented on the results, "We continue to see the results of our focus on the effective implementation of our business strategy. Harley-Davidson's strategy provides the roadmap for success over the long-term through exceptional product development, manufacturing and retail capabilities."

Segmental Information

North America remains the most important sales region for the company. The company sold 55,761 motorcycles in the U.S., up 4.0% compared with last year. Canadian sales were up 1.8% to 4,881 units. European sales fell 9.1% to 14,639 units as consumers are tightening up in the region. Sales in the Middle-East and Africa region rose 23.2% to 1,797 units. Japanese sales fell 7.3% to 2,898 units, while sales in the remainder of the Asian region came in at 3,509 units, up 30.1%.


For the full year of 2012, the company guides to ship 245,000-250,000 motorcycles, up 5-7% compared with 2011. In the third quarter, the company guides to ship 51,000-56,000 motorcycles, a decrease of 9.3% to 17.4% compared with last year. Lower shipments are related to the implementation of ERP and surge production systems at its York, Pennsylvania, manufacturing site. Full-year gross margins are expected to come in between 34.75% and 35.75%. Full-year capital expenditures are estimated at $190-$210 million.


Harley-Davidson ended its second quarter with $2.4 billion in cash, equivalents, marketable securities and restricted cash held in variable interest entities. The company has roughly $5.3 billion in short- and long-term debt outstanding, for a net-debt position of $2.9 billion. For the first six months of 2012 the company reported revenue of $2.84 billion, on which the company reported net income of $419 million, or $1.81 per diluted share.

The company is on track to generate annual revenue of $5.5 billion for the full year of 2012. Full-year earnings could come in at $3.50-$4.00 per share. At Friday's closing price of $42.39, the market values the firm at $9.8 billion. This values Harley-Davidson at 1.7 times annual revenue and 12 times 2012's expected annual earnings. Competitor Polaris (PII) trades at 1.9 times revenue and 20 times annual earnings.

Currently, the company pays a quarterly dividend of $0.16 per share for an annual dividend yield of 1.5%.

Investment Thesis

Shares of Harley Davidson have returned 9% so far in 2012, now trading at $42.39 per share. Shares peaked at $54 in the beginning of May and have steadily fallen from that moment in line with the wider market. Shares fell another 5% on the back of the earnings report as investors were not happy with the weak results in Europe.

Long-term investors in Harley-Davidson are better off buying their bikes. Over a 10-year period shares have fallen 5%, and the meager dividend rate of 1.5% is not enough to provide investors with sufficient returns. Shares peaked at $75 in 2006 and hit lows of $10 in 2009, before steadily rising again to levels around the $50 level earlier this year.

While Harley-Davidson has a loyal group of fans, who love to ride their bikes and even tattoo the name on their bodies, it lacks an investment community that adores the shares in the same manner.

Shares continue to fluctuate with the merits of predominantly the U.S. economy, as the iconic brand still lacks a strong global presence. Earnings and revenue are heavily dependent on the state of the economy. As the company lacks a sustainable strong financial performance, investors should not invest in the stock for long-term gains.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.