Harley's Beat: Was High Crude the Buffer?

So, maybe it would seem high gas prices are providing a buffer for Harley Davidson (HOG) against the economy?

Harley-Davidson (HOG) reported Q2 EPS of $0.95 this morning, 19 cents better than estimates. Revenue for the quarter was $1.57 billion vs. consensus of $1.4 billion.

"During the second quarter we shipped 80,326 Harley-Davidson® motorcycles to our dealers and distributors around the world. While this result exceeds our guidance range of 76,000 to 80,000 units for the quarter, it is a decrease of 15.6 percent from the year-ago period. This decrease reflects the impact of the shipment reduction we announced April 17th in response to ongoing weakness in the U.S. economy," said Jim Ziemer, CEO.

For the first six months of 2008, revenue totaled $2.88 billion, a 2.9 percent increase over the year-ago period. Earnings per share were $1.74, a decrease of 7.9 percent compared to the same period last year.

Through the first six months of this year, shipments of Harley-Davidson motorcycles were 152,194 units, a 6.6 percent decrease compared to last year's 162,878 units.

The Company expects to ship between 74,000 and 78,000 Harley-Davidson motorcycles during the third quarter of 2008. For the full year of 2008, Harley-Davidson still plans to ship between 303,500 and 307,500 units. The Company continues to expect full-year EPS of $3.00 to $3.18.

The Company repurchased 1.3 million shares of its common stock at a cost of $50.0 million during the second quarter of 2008. On June 29, 2008, the Company had 235.3 million shares of common stock outstanding. As of June 29, 2008, there were 19.3 million shares remaining on a board- approved share repurchase authorization.

When one consider the current economic environment and credit conditions out there, these results really are fantastic. Far from a "luxury item", it would seem motorcycles, especially Harleys, are becoming the alternative of choice for gas-pained consumers.

Here is the kicker: When credit conditions improve, sales ought to increase even further. One really ought not expect oil and gas prices to fall very far anytime soon so motorcycles as an alternative will remain while becoming more affordable.

International sales: the current growth of the company grew 11%. What will be interesting, and I hope it is asked on the earnings call, is what contribution can be expected from the recent acquisition. Also, can someone ask, is the double digit growth these is expected to continue for a while?

Disclosure: Long HOG

Comments

[Joe Friday:]

while the results certainly appear to be good at first glance, a closer look reveals some much bigger issues.
1. their inability to sell the financing paper has meant that they are financing the majority of their bikes and taking back the paper on to their balance sheet. They are holding 3.8B of finance receivables on their balance sheet, and increase of 600M qoq.
2. The default rate on that paper, according to the cc was about 5%, and the ltv is very high (quite a bit of no down payment financing). They are at risk for large write offs down the road if the resale value of the bikes doesn't hold up and if their default rate spike at all. Big bikes are a luxury item for most people, and the default rates and resale value of the boat market would indicate that their are major risks in this regard for HOG.

HOG's balance sheet now has 3.8B of total financing receivables for bikes, not including their inventory financing to dealers, on total assets of 6.8B.

Investors in HOG need to appreciate that they are buying a finance company as well as a motorcycle company.

2008 Jul 18 11:31 AM

[mallarde:]

Todd is correct on one thing -- the double-digit growth overseas must continue.

He is completely wrong that people trying to pinch pennies will buy a HOG. Todd, do you live in Wisconsin, or something? People trying to save money don't buy $20K motos. They usually by scooters or KLRs or beat-up Viragos.

Also, how many HOG buyers use their bikes to go to the grocery store/work, and how many use them to putz around on Sunday? Or take a trip across the country? Most use them for recreation -- which means expensive gas makes their recreation even more expensive than just the HOG they sit on.

Would expensive gas make an high-mpg yacht more marketable? OK, I have shouted myself out on this issue.

HOG's weakness in its domestic market is deadly. Expensive oil will not save it, but hurt it.

2008 Jul 18 01:22 PM

[Joe Friday:]

also worth noting with respect to the overseas sales, that currency exchange added about 40M to their earnings this quarter. I am not sure that is sustainable. The dollar has strengthened somewhat recently, and the European market has shown weakness in the auto business..

2008 Jul 18 04:45 PM

[David Tsao:]

I would tend to agree with Mallarde, but still picked up HOG a few weeks ago. Harley's aren't about function, they're about image and style. Higher gas prices, makes looking good and feeling good more costly.

I still bought HOG because they will turn around when the economy turns around. It's not often you can buy a classic piece of Americana at this price.

2008 Jul 19 01:21 AM

[David Tsao:]

ronh,

although Europe's auto business is showing weakness, moto's are a way of life over there. Have you ever hit any of the cities in Italy? People willing to shell out premiums for a Harley, will distinguish themselves from the Piaggio loving public over there. The same goes for India, where it's all about dinky Hero Honda bikes. I asked a fellow coworker when I was there last year if he would ride a Harley around the streets of Mumbai... "fantastic" is the word he used. Affording one is a different story, but in time things should look good for Harley in emerging markets.

There is a good story the Chicago Tribune ran about Hog's versus Royal Enfields in India. An interesting read.

www.chicagotribune.com...

2008 Jul 19 01:30 AM

[Joe Friday:]

David, thanks for posting that link. It was indeed an interesting read. Although I can see the prestige value of a Harley in India and elsewhere, I doubt India will ever be a significant market for HOG. My guess is that Harley will always have a certain cache, both in the US and elsewhere, the real issue, as I see it, is whether the current stock price is sustainable. I think not, expensive gas consuming toys are all going to be under pressure for the near future. That includes, RVs, SUVs, Boats, and Harleys.

2008 Jul 21 02:27 PM

[FUJIMO:]

Cudos to HD for diversifying all of their new models Buell 1125, V Rod & MV Agusta.
This is the future for suvival in a world economy, for most riders are motorcyclist not bikers

There will always be a V-45 twin as long as they can make epa[border line with present v-45 models ] standards. But for the Co to be a producer as in the past they have to look at the future. HOG looks much brighter to me with there new lineup.

I get the impression that if they say HERE IS WHO WE ARE! There sheep may become irritated.

2008 Jul 22 03:41 PM