David White

Recreational Vehicle Sector: Seriously Overbought

HOG has had a recent run up. It seems to be mostly due to the recent announcement that HOG will sell its motorcycles in India beginning next year. One might at first think this should be a great success as the country's population is over 1 billion people.

At second glance this does not appear to be such a big winner. The Indian government will charge HOG a 105% duty on all motorcycles. Plus there will be start up costs, etc. The average motorcycle sold in India sells for approx. $1227. With the 105% duty, a cheap HOG will sell for $14,000+. The custom bikes start at $25,000+ in the US. That will make them over $50,000 in India. Some may range up to $100,000 or more. Isn't that an enticing thought.

If all that's not bad enough, other manufacturers such as Honda have many fewer mechanical problems over their lifetimes. They are cheaper and easier to repair. It's hard to justify buying a HOG in the US. If you were paying 105% more for your HOG, you would really think twice. This plan seems like a dud from the word go, unless HOG can get India to drop the duty charges. When and if India does this, I will then consider the possibilities India sales may accrue. Even without the duty, HOG's are still much more expensive than the average motorcycle sold in India. New CEO's are always out to show up the last guy. The words flow through their lips like honey. Frequently the profits do not. This seems likely to be one of those cases.

Recreational Vehicle Sector: Seriously Overbought

Chevy announced an mpg spec on the Volt of 230mpg, which Chevy called conservative. Volt will have a 300 mile range. This is likely to hurt HOG, which is now more obviously a "gas" HOG.

Recreational Vehicle Sector: Seriously Overbought

There do not appear to be good fundamental reasons for the recent rise in HOG. Often the brokerages, etc. will engineer this type of rise, when such a company is about to try to raise money through a new stock offering or a new debt offering. Either of these events would likely cause a significant decrease in the share price.

Recreational Vehicle Sector: Seriously Overbought

Dr. Roubini now forecasts below par growth for the US of about 1% for both 2010 and 2011. If he is right, this likely means there will be no upturn for HOG anytime in the near future. It also means continued high unemployment for a long time, which means trouble for HDFS’s loans. HOG had trouble getting the money for HDFS to continue to operate in 2009 (about $1B). HOG will have even more trouble getting money in 2010 and 2011. It's credit rating (lowered to BBB recently) is likely to get lowered further. The loans the HDFS is now holding "for investment" may go into default in large chunks. This will further increase HOG's problems.

Supporting Dr. Roubini's thesis, Paul Krugman, a Nobel Laureate economist, is now saying that the world needs a second stimulus to avoid a lost decade (such as Japan's of the 1990's).

Notably both the US Congress and President Obama have said they have no plans for a further stimulus at this time. Obama insists that the current stimulus will start to be felt more as time goes on.

Congress does keep approving more money for things like cash for clunkers. However, this doesn't really help HOG. This program does not apply to motorcycles.

Recreational Vehicle Sector: Seriously Overbought

Another factor which may play into the market direction may be the recent crackdown by the SEC on illegal short sellers. Apparently on Wednesday this led to the heavily shorted stocks outperforming the non-shorted stocks to the upside fairly dramatically. See the following article by Bespoke:
seekingalpha.com/artic...

HOG short interest is approx. 19.5% of the float. This SEC factor may provide some short term distortions of what one might normally expect from the stock performance. Longer term it likely won't matter.

Recreational Vehicle Sector: Seriously Overbought

HOG was one of five companies listed in a recent Motley Fool article about companies in which you need to protect your gains. This bodes well for a downturn.

Recreational Vehicle Sector: Seriously Overbought

Barclay's bad debts almost doubled last quarter. This is particularly bad news for HDFS, which may see some of the same phenomenon.

Recreational Vehicle Sector: Seriously Overbought

Robert H.: Interesting information about the house refinancings. However, these have been up for at least the first two quarters of this year. HOG has missed on earnings for the last 4 quarters straight. Last quarter earnings were predicted at $.24, but actual earnings were $.08. This is a big miss. Even with house refinancings up in 1H, HOG was still going strongly downhill.

I agree that the brand has a lot of cache. However, even that may get hurt in the future. As the economy recovers oil prices (gasoline prices) will go up dramatically as China, India, etc. use more oil. Harley's are gas guzzlers compared to most other motorcycles. They are the big bad boys. This may not be quite so "in" as gasoline prices go up. This will likely hurt the cache.

Further HOG switched their accounting for most of their HDFS loans from "held for sale" to "held for investment" in Q2 2009. In other words they couldn't sell the loans for anywhere close to face value. They had to keep them, or they would have had to take huge losses on their books. HOG has avoided that so far. However, if Moody's is correct about mid 2010 being the high point of the credit card charge off rates of 12% to 13% (say its around 10% now), then HOG is going to take substantial losses all through 2010. HOG is getting hurt two ways here. First the high unemployment leads to a higher default rate. Second the high unemployment (bad motorcycle market) leads to lower values for the repo's, when the loans default. I don't believe the current estimates accurately reflect this situation. It is generally my impression that analysts do not like to be overly pessimistic until they have to be. Many people thought the recovery would come sooner. Many people thought the job market would rebound sooner. Both of those areas have proven to be much worse than intially expected. Eventually the 2010 estimates will reflect that. The trend is strongly downward, which is a good indication. The current earnings estimate for 2010 is $1.27. I would be very surprised if it did not move below $.90 in the next 3 months. It seems likely to move even lower from there.

Recreational Vehicle Sector: Seriously Overbought

Robert H.: The FPE listed in Yahoo is for 2010 earnings. You cannot just look at the number. You need to look at the trend in the earnings estimates. In the last 90 days the earnings estimates for 2009 have been cut by more than 50%. The earnings estimates for 2010 have been cut by about 1/3. The trend is still strongly downward.

Moody's predicts that the charge off rate for credit card debt will peak in mid 2010. This is likely when the bottom of the HOG market will be. Remember HDFS is likely to see the same problems the credit card issuers are going to see. This means the estimates for 2010 are likely to keep going down at least until the end of this year. The most accurate assessment of health you can make at this time is probably the 2009 FY PE based on FY earnings estimates (which are also still trending downward). The current FY earnings estimate listed on Yahoo Finance is $.59. At a price of $22.60, that is a 2009 PE of $22.60/$.59 = 38.31. If you consider the estimated earnings are still likely too high, the likley 2009 PE is likely over 50. That makes HOG stock far too expensive.

Unemployment is predicted to go to 10+%. It is supposed to stay over 10% throughout 2010. That likely means the market for HOG motorcycles will be worse in 2010 than it has been in 2009. This recovery is predicted to be a long drawn out one. Some are predicting a double dip recession. Very few if any economists are predicting a quick recovery.

The stock market is usually said to predict events about 6 months in advance. It is not said to predict events 1.5 years in advance. This is partially because estimates that far in advance are often inaccurate. Go with the 2009 PE as the most accurate current predictor you can find. Realize logic dictates that 2010 will likely not be a better year than 2009 for HOG. A non-growth company does not deserve to have a 2009 PE of 38, especially when that PE may more accurately be over 50. This stock is far over bought. Plus the chart is giving indications of topping out.

The current rally is likely close to seeing a correction. I saw one estimate of 11% by Emily Saunders. HOG is due for a retracement. If the over all market retracement comes soon, HOG is likley to plummet.

All that being said. The automakers are supposed to report great sales results tomorrow based in good part on the cash for clunkers program. HOG could go up in sympathy, or it could go down because it is not part of the cash for clunkers program. It is hard to predict which way the market will react short term. Longer term the fact that HOG is not part of the cash for clunkers program will hurt HOG.