Harley Davidson Pulls A 'Jedi Mind Trick'

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

While experts are mixed on the country's economic outlook, one company poised to remain profitable whether the economy continues to grow, or fall into a deeper recession, is Harley Davidson (Harley (NYSE:HOG)). Not only has Harley embraced automation in order to reduce costs, over the past three years it has cut half the staff (over 1,000 hourly workers) at its York, PA plant and more job cuts are expected at other facilities.

Where previously Harley was built for strong profits when operating at maximum capacity, it now has the flexibility to increase operating margins below peak levels of demand. According to the company's 10-K report, in 2007 it achieved an operating margin of 15.2% on revenue of $6.1 billion. By 2011 Harley's revenue had declined approximately 13.5% to $5.3 billion. However, its operating margin improved to 15.6% - a "Jedi mind trick" of sorts.

Some of the company's biggest efficiency gains came at its York facility. According to the Wall Street Journal's Harley Goes Lean to Build Hogs:

Harley got more serious about cutting costs when Keith Wandell became chief executive in 2009 amid a severe slump in motorcycle sales. On his first visit to the York plant, Mr. Magee recalled, Mr. Wandell declared the layout and working methods unsustainable. Harley began scouting sites for new plant to replace York and settled on Shelbyville, Ky. The company notified the International Association of Machinists and Aerospace Workers, or IAM, which represents York workers, that the plant would close and move to Kentucky unless they approved a new contract giving Harley more control over costs. Union members voted overwhelmingly to make concessions, and Harley stayed in York.

Harley's DNA

In the early 1970s Harley produced bikes that were more expensive and of lower quality and design in comparison to Japanese competitors. After a serious diminution of its brand and loss of customer loyalty, the company nearly went bankrupt. It eventually improved quality and embraced the retro look and "Harley sound" that made it popular with loyalists to begin with. After Harley completed its initial public offering in 1987, its comeback was complete. It became known for the quality of its bikes, and for keeping production below demand in order to maintain the bike's cache. That said, the company expects to restructure its plants in Kansas City, Mo. and Milwaukee, Wis., resulting in cost reductions of approximately $275 million.

I am bearish on the U.S. economy. Long-term unemployment remains intractable - the reduction in jobs at Harley are in addition to the mass lay offs recently announced by Bank of America. In addition, Richmond Fed President Lacker's recent dissenting comments on QE3 suggest that "the pain ahead" for the U.S. economy is all but a given. However, Harley has a proven management team and the flexibility to remain profitable even if a double-dip recession materializes. Yet given the economy's anemic vital signs, I am neutral on the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.