Punter Patel

Caraco Pharmaceutical: Underappreciated and Undervalued, Part 2

This will get acquired by SUNP eventually and SUNP has no interest in creating value in Caraco as it is not in its interest when time comes to acquire the remaining shares. Appreciate your detailed analysis though.

Recreational Vehicle Sector: Seriously Overbought

Bill: Below is the text from company's IR site for 2Q earnings released on July 16th
**********************...

Harley-Davidson Reports Second Quarter 2009 Results, Lowers Full-Year Shipment Plans, and Provides Restructuring Update
Earnings Drop Reflects Impact of Lower Shipments, One-Time Reclassification of Finance Receivables and Goodwill Write-Off Related to HDFS

Decline in Retail Motorcycle Sales Prompts Shipment Reduction, Additional Workforce Reduction

UPDATED July 16, 2009, 8:00 A.M. CDT to correct hourly workforce reduction numbers and reporting period for cash flow and capital expenditures.

MILWAUKEE, July 16, 2009 -- Harley-Davidson, Inc. (NYSE:HOG) reported decreased revenue, net income and diluted earnings per share for the second quarter of 2009 compared to the year-ago period.

Net income of $19.8 million and diluted earnings per share of $0.08 were primarily affected by the planned 27.6 percent reduction in motorcycle shipments compared to the year-ago period and by two non-cash charges related to HDFS: a $72.7 million credit loss provision for a one-time reclassification of motorcycle loan receivables; and a one-time $28.4 million charge to write off the total goodwill associated with HDFS.

Worldwide retail unit sales of new Harley-Davidson® motorcycles were down 30.1 percent compared to the year-ago quarter. Retail new Harley-Davidson motorcycle sales in the U.S. were down 35.1 percent and declined 18.2 percent in international markets compared to last year's second quarter. Industry-wide retail sales of heavyweight motorcycles in the U.S. declined 48.1 percent for the same period.

"While the underlying fundamentals of the Harley-Davidson brand remain strong and our dealers' retail motorcycle sales declined less than our competitors, it is obviously a very tough environment for us right now, given the continued weak consumer spending in the overall economy for discretionary purchases," said Harley-Davidson, Inc. President and CEO Keith Wandell.

In light of the decline in retail motorcycle sales, the Company also lowered its 2009 shipment expectations for Harley-Davidson motorcycles. The Company now plans to ship between 212,000 and 228,000 Harley-Davidson motorcycles to dealers and distributors worldwide in 2009, or 25 percent to 30 percent fewer than the 303,479 shipped in 2008. Prior 2009 guidance was for shipments of 264,000 to 273,000 motorcycles. In the third quarter of 2009, the Company expects to ship 52,000 to 57,000 Harley-Davidson motorcycles.

As a result of the lowered shipment volume, the Company will implement a further reduction this year of approximately 700 positions in the hourly production workforce. Harley-Davidson will also be reducing the non-production, primarily salaried headcount by an approximate 300 additional positions, including a reduction at HDFS. The Company plans to offer a voluntary separation incentive package to eligible salaried employees. Earlier this year, the Company had announced workforce reductions totaling about 1,100 to 1,200 hourly production positions in 2009 and 2010 and about 300 non-production, primarily salaried positions.

"We continue to take these difficult actions to manage through the current challenges and we also continue to take major steps in creating the operational effectiveness that is essential to our long-term future," said Wandell. "We are committed to doing what is required to enable Harley-Davidson to operate as a competitive business and employer over the long haul."

The Company continues to expect full-year gross margins to be between 30.5 percent and 31.5 percent.

Details of Harley-Davidson, Inc. Second-Quarter and Six-Month Results

Second Quarter. Net income for the quarter was $19.8 million, compared to $222.8 million in the second quarter of 2008, on revenue of $1.15 billion compared to $1.57 billion in the year-ago period. Diluted earnings per share for the second quarter were $0.08, compared to diluted earnings per share of $0.95 in last year's second quarter.
A key factor affecting earnings was the one-time reclassification of finance receivables from held-for-sale to held-for-investment and the related $72.7 million non-cash provision to establish the related initial credit loss allowance.

In addition, as a result of Harley-Davidson's lower shipment volume projections, the Company recorded a non-cash, one-time $28.4 million impairment charge to write off the goodwill recorded in connection with the 1995 purchase of HDFS.

The Company believes HDFS continues to have significant strategic value despite the write-off of remaining goodwill caused by the current economic environment.

Six Months. For the first six months of 2009, Company revenue totaled $2.44 billion, a 15.1 percent decrease from the year-ago period. Diluted earnings per share were $0.59, a decrease of 66.1 percent compared to the same period last year. Net income was $137.1 million, compared to $410.4 million in the first half of 2008.

Strategy for the Current Economic Environment

In early 2009, Harley-Davidson announced a three-part strategy for managing through the global economic downturn and strengthening its operations and financial results going forward. That strategy consists of: 1) investing in the brand; 2) creating the appropriate cost structure; and 3) obtaining funding to support the lending activities of HDFS.

Brand Investment
Reductions in Harley-Davidson's motorcycle shipment plans for 2009 reflect the Company's intense focus on maintaining brand strength. "When it comes to protecting and enhancing the brand, managing supply in line with demand is one of the most important things we can do. We plan to ship fewer Harley-Davidson motorcycles worldwide this year than we anticipate dealers will sell at retail," Wandell said.

At the same time, Harley-Davidson continues to make significant investments in product development and marketing, and the Company is more focused than ever on making those investments work harder and smarter, according to Wandell. "We've got a great lineup of motorcycles and one of our top priorities is to reduce complexity and improve efficiency throughout our product development and manufacturing processes," said Wandell.

On July 25, 2009, Harley-Davidson Motor Company introduces 2010 model year motorcycles at its Summer Dealer Meeting in Denver.

Cost Structure
The Company earlier this year announced plans to consolidate its two Milwaukee-area powertrain (engine and transmission) plants into one facility; consolidate paint and frame operations at its York, Pa. facilities into one plant; and close its Franklin, Wis. Parts and Accessories distribution center and consolidate those operations with General Merchandise distribution through a third-party logistics company. In April, the Company completed the transition of its U.S. transportation fleet operations to a third-party provider as part of its restructuring initiatives.

Powertrain Consolidation Accelerated. Production shutdowns and line rate adjustments will be implemented at Harley-Davidson powertrain operations in Menomonee Falls and Wauwatosa, Wis., and at motorcycle assembly operations in York, Pa. and Kansas City, Mo., to achieve the newly-announced unit volume reduction. As a result of the volume reduction and production shutdowns, the Company expects to accelerate and substantially complete the planned consolidation of the powertrain operations by mid-2010.

Sportster® and V-Rod® motorcycle final assembly operations and V-Rod motorcycle powertrain production in Kansas City, and production of Sportster motorcycle powertrains in Wauwatosa will be shut down for approximately 14 weeks in 2009, including the entire fourth quarter. The Company anticipates that other production operations will be shut down for a total of approximately five weeks over the rest of 2009.

On a combined basis, Harley-Davidson now expects the volume reductions and restructuring activities to result in one-time charges of approximately $160 million to $190 million over the course of 2009 and 2010, an increase of $40 million from earlier estimates, including $50.0 million incurred during the first half of 2009. The Company now estimates ongoing annual savings of approximately $140 million to $150 million, or $70 million greater than previously estimated, upon completion of the announced restructuring actions. Savings in 2009 are now estimated to be $70 million to $85 million.

York Study Underway. Since the announcement of the original consolidation plans in January, Harley-Davidson has determined that the Company's York operations are not currently competitive or sustainable. The Company has undertaken a "two path" study to determine whether major, additional restructuring at York can achieve cost and efficiency targets to make the operations viable, or alternatively, whether the Company will relocate the York operations to another U.S. location. The Company expects to make a decision on the status of the York operations later this year.

HDFS Funding
Harley-Davidson continues to focus intently on the funding needs of HDFS and, utilizing a variety of funding paths, has provided liquidity for expected HDFS lending activities through the end of this year and into 2010. The Company continues to evaluate additional funding actions to diversify funding sources and balance long-and short-term HDFS debt needs, as well as provide sufficient liquidity for new loan originations.

Business Segment Second-Quarter and Six-Month Results

Motorcycles and Related Products Segment
Second Quarter. Revenue from Harley-Davidson motorcycles during the second quarter of 2009 was $808.7 million, a decrease of $375.7 million or 31.7 percent versus the same period last year. The Company shipped 58,179 Harley-Davidson motorcycles in the second quarter of 2009 compared to 80,326 motorcycles shipped in the year-ago period and within the Company's guidance for this year's first quarter.

Revenue from Parts and Accessories (P&A), which consists of Genuine Motor Parts and Genuine Motor Accessories, totaled $231.5 million, a decrease of $34.2 million or 12.9 percent versus the year-ago quarter. Revenue from General Merchandise, which includes MotorClothes apparel, totaled $69.6 million, a decrease of $7.2 million or 9.4 percent from the year-ago quarter.

Gross margin for the second quarter of 2009 was 33.5 percent of revenue compared to 35.7 percent for the second quarter last year. Operating margin was 14.5 percent, compared to 20.1 percent in the second quarter of 2008. Gross and operating margins were adversely affected during the quarter by the shipment volume reduction.

Six Months. Through the first six months of this year, shipments of Harley-Davidson motorcycles were 132,849 units, a 12.7 percent decrease compared to last year's 152,194 units. Harley-Davidson motorcycle revenue through six months was $1.82 billion, down 17.2 percent compared to last year's $2.20 billion. Six-month P&A revenue totaled $401.2 million, a 10.4 percent decrease from last year's $447.6 million. General Merchandise revenue totaled $144.8 million, a 10.0 percent decrease compared to $160.8 million during the same period in 2008. Gross margin through six months was 35.3 percent and operating margin was 16.2 percent, compared to 36.1 percent and 20.1 percent respectively in last year's first half.

Motorcycle Retail Sales
Second Quarter. During the second quarter, worldwide retail sales of Harley-Davidson motorcycles decreased 30.1 percent compared to the prior-year quarter. In the U.S., retail sales of Harley-Davidson motorcycles decreased 35.1 percent from the year-ago period. Industry-wide retail sales of heavyweight motorcycles in the U.S. declined 48.1 percent during the quarter.

In international markets, retail sales of Harley-Davidson motorcycles decreased 18.2 percent during the second quarter of 2009 compared to the second quarter of 2008.

Six Months. For the first half of 2009, worldwide retail sales of Harley-Davidson motorcycles declined 23.6 percent compared to the prior year. U.S. retail sales of Harley-Davidson motorcycles declined 26.1 percent for the first half of the year while the U.S. heavyweight market segment was down 40.0 percent for the same period, compared to the year-ago period. International retail sales of Harley-Davidson motorcycles decreased 17.8 percent for the first six months of 2009 compared to 2008.

First half data are listed in the accompanying tables.

Financial Services Segment
Harley-Davidson Financial Services recorded an operating loss of $62.1 million for the second quarter, compared to operating income of $37.1 million in the year-ago quarter. In addition to the effects of the finance receivables reclassification HDFS recorded $15.0 million in writedowns on retained securitization interests due to expected higher credit losses compared to a $6.3 million write-down in the year ago period. For the first half of 2009, HDFS reported an operating loss of $50.9 million, compared to operating income of $72.1 million for the prior-year period. In addition, the Company wrote off $28.4 million of goodwill associated with HDFS.

Income Tax Rate
The Company's second-quarter effective income tax rate was 71.6 percent, compared to 36.0 percent in the same quarter last year. This increase was due primarily to the non-deductible goodwill write-off and the tax implications of MV Agusta, which the Company acquired in August 2008. The Company expects its full-year 2009 effective tax rate to be approximately 55 percent due to the items listed above as well as the previously reported one-time tax charge of $22.5 million in the first quarter of 2009 and the implications of reduced shipments on earnings for the remainder of the year.

Cash Flow
Cash and cash equivalents totaled $1.03 billion as of June 28, 2009, compared to $803.4 million at the end of the year-ago period. Cash used by operations was $164.4 million and capital expenditures were $57.3 million during the first six months of 2009. For the full year, capital expenditures are now expected to be $145 million to $175 million, including $20 million to $30 million related to restructuring activities.

Company Background
Harley-Davidson, Inc. is the parent company for the group of companies doing business as Harley-Davidson Motor Company (HDMC), Buell Motorcycle Company (Buell), MV Agusta and Harley-Davidson Financial Services (HDFS). Harley-Davidson Motor Company produces heavyweight custom, touring and cruiser motorcycles. Buell produces American sport performance motorcycles. MV Agusta produces premium, high-performance sport motorcycles sold under the MV Agusta® brand and lightweight sport motorcycles sold under the Cagiva® brand. HDFS provides wholesale and retail financing and insurance programs primarily to Harley-Davidson and Buell dealers and customers.

Forward-Looking Statements
The Company intends that certain matters discussed in this release are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes," "anticipates," "expects," "plans," or "estimates" or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets, guidance or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this release. Certain of such risks and uncertainties are described below. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this release are only made as of the date of this release, and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

The Company's ability to meet the targets and expectations noted depends upon, among other factors, the Company's ability to (i) effectively execute the Company's restructuring plans within expected costs and timing, (ii) successfully achieve with our labor union partners flexible and cost-effective agreements to accomplish restructuring goals and long-term competitiveness, (iii) manage the risks that our independent dealers may have difficulty obtaining capital, and adjusting to the recession and slowdown in consumer demand, (iv) manage supply chain issues, (v) anticipate the level of consumer confidence in the economy, (vi) continue to have access to reliable sources of capital funding and adjust to fluctuations in the cost of capital, (vii) manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio, (viii) continue to realize production efficiencies at its production facilities and manage operating costs including materials, labor and overhead, (ix) manage production capacity and production changes, (x) provide products, services and experiences that are successful in the marketplace, (xi) develop and implement sales and marketing plans that retain existing retail customers and attract new retail customers in an increasingly competitive marketplace, (xii) sell all of its motorcycles and related products and services to its independent dealers, (xiii) continue to develop the capabilities of its distributor and dealer network, (xiv) manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations, (xv) adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices, (xvi) adjust to healthcare inflation, pension reform and tax changes, (xvii) retain and attract talented employees, (xviii) detect any issues with our motorcycles or manufacturing processes to avoid delays in new model launches, recall campaigns, increased warranty costs or litigation, (xix) implement and manage enterprise-wide information technology solutions and secure data contained in those systems, and (xx) successfully integrate and profitably operate MV Agusta Group.

In addition, the Company could experience delays or disruptions in its operations as a result of work stoppages, strikes, natural causes, terrorism or other factors. Other factors are described in risk factors that the Company has disclosed in documents previously filed with the Securities and Exchange Commission. Many of these risk factors are impacted by the current turbulent capital, credit and retail markets and our ability to adjust to the recession.

The Company's ability to sell its motorcycles and related products and services and to meet its financial expectations also depends on the ability of the Company's independent dealers to sell its motorcycles and related products and services to retail customers. The Company depends on the capability and financial capacity of its independent dealers and distributors to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the Company. In addition, the Company's independent dealers and distributors may experience difficulties in operating their businesses and selling Harley-Davidson motorcycles and related products and services as a result of weather, economic conditions or other factors.












# # #







© 2001 - 2009 H-D. All rights reserved. Legal Notice. Privacy Policy. We Care About You.

Recreational Vehicle Sector: Seriously Overbought

Short squeeze is in place as the short ratio is almost 20% as per Bloomberg. The short ratio was around 19% when the price was at $17 pre June quarter earnings announcement. Shorts have not covered and it is possibility that shorts are now covering. Short sellers do not typically short stocks that are in the up-trend and fresh shorts could be replacing closed out shorts only as there is no increase in short ratio. I really doubt if this is moving up because of incremental interest on the long side of the trade. Once the trend reverses, this could come back down at equally fast pace.

We need to watch out for how Mr. Buffett and Davis funds react to the price. Berkshire have not owned the common shares and I doubt they will do so at this price but Davis funds have been long time holders in the name and they have even subscribed to the $300 mm worth of pref shares (of course at a very high rate of 15% p.a. coupon rate). If Davis starts selling, shorts will indeed make money but so far they are sitting on this one tight.

The most compelling argument for being short in this one is the issues related to their financing arm. I will not be surprised if the company attempts to spin out HDFS (even if it means taking hit on the book value). The company has been very quite about the quality of their loan book and analysts have done terrible job at asking tough questions (they can't call it an outright SELL and expect to earn i-banking fees that can come their way for spin-off of HDFS or reselling of HDFS' loan book so don't hope for their honest opinion anytime soon).

I agree that nobody looks at Honda, Kawasaki, Harley side by side and then purchase Harley. People purchase Harley because they really WANT Harley and only Harley. I agree that Harley has fantastic brand loyalty and we can't deny the brand value but this is not just a company that manufactures motorcycles. Just look at the past 3-4 years earnings and we can see that large portion of it came from financing opearations. It is also a non-banking financing company with loan portfolio that has 15%-20% of the loans in sub-prime segment (as admitted by their CFO in last earnings call) and if the company had not been able to refinance using TALF money, it would have gone for restructuring of HDFS already. Time is on its side for now but in order for this to be a safe long-bet, HDFS net interest margins have to pick up, borrowing costs has to go down and sales volume has to go up. I think the world has changed in last one year. Cheap credit fueled the sales and converted buyers. I feel that Harley buyers will buy one not because he/she gets cheap credit but because he can afford the payments and loves Harley. Hard to afford payments when the cost of borrowing is high and employemt picture is not so bright in the short to medium term.

Another factor to watch out is operating margin erosion. If the management is so confident of the sales growth, they won't be laying off plant workers. If number of units sold drops, there will be a reversal in economies of scale. Also check out the movement of base metals in last one month and it is obvious that input cost will only go up in the coming 2-3 quarters for every single part that goes into making of a Harley.

How about international sales? More Chinese can afford Harley but Harley has not made any progress and Indians are still making less than $3000 per capita per year so it will be a long time before they think about riding on a Harley.

I am curious if anyone has done any valuation exercise of HDFS and the manufatucing business seperately.

Disclaimer: Have been adding to my short position since $17 and today I bought some puts.

Harley-Davidson in the Mire and Likely to Stay There

I just tried to short HOG and my broker has run out of stock-borrow. This means short interest has gone up today. Analysts meet is not boosting confidence....

Harley-Davidson in the Mire and Likely to Stay There

Below is the bullish note from DB analyst. I was not aware of any analyst day meet so this was a surprise. (BTW: The company has selectively shared information to analysts and has not posted any presentation copy to their website for ALL investors. Unless you are a client of the brokers, you don't get to hear what the CEO shares.This is a clear violation of Regulation FD by the company).

My comments on DB's analysis is at the end.


Deutsche Bank Maintains a 'Buy' on Harley Davidson (HOG); Raises Price Target on More Confident Outlook

July 28, 2009 11:32 AM EDT

Deutsche Bank maintains a 'Buy' rating on Harley Davidson (NYSE: HOG), raises price target from $21 to $26.

Deutsche analyst say, "We attended Harley Davidson's Dealer/Analyst meeting in Denver, at which the company rolled out its new models and merchandise for 2010, and discussed key priorities for the short and intermediate term. Although management did not convey any optimism regarding the near term outlook for motorcycle demand, we came away more confident in HOG's ability to maintain recent market share gains and return the business to historic margin levels."

"We were also pleased to hear management reiterate their commitment to supporting prices and residuals, by aggressively curtailing production. And expressed strong confidence in their ability to restore the business to historical margin levels Possibly approaching the 20% EBIT margin levels achieved earlier this decade, even if demand does not recover. In addition to $140-$150 MM of cost savings that have already been identified, management reiterated that they see an enormous cost reduction opportunity at their York, Pa manufacturing complex."
- Baird is raising their target to $28 (prev. $21) and reiterating Outperform rating after the firm talked with management/dealers in meetings in Denver. They believe the turnaround story is building momentum led by a credible CEO with impressive credentials. Beyond the standard Harley noise – they advise investors to focus on the strength of the brand, opportunities to lower structural cost, and ideas to finance HDFS in better ways. Details were limited, but Baird believes the turnaround story will attract investment.

Summary. The presentation lacked tangible goals or meaningful metrics, leaving investors to overweight intangible clues – which were bullish. Firm notes they like that management is addressing structural cost, cutting dealer inventory, boosting residual values, refining the dealer network, exploring options for HDFS, and offering investors a more credible outlook. As the turnaround unfolds, they expect investors to demand more tangible metrics – but initial impression is favorable.

Brand. Dealers tell the firm more bikes are selling below MSRP, which diminishes the value of the brand. Management acknowledged this problem and vowed to protect the brand at all costs, starting with plans to slash production announced in earlier this month. Baird expects days inventory to drop to 75-90 days from 90-110 days, potentially creating short waiting lists again. Naturally, residual values should improve – which has favorable implications for HDFS.

Cost. The Harley-Davidson brand is among the best on the planet, but its operations fall short of world-class. CEO Keith Wandell brings impressive operational credentials to Harley, understands its shortcomings, and has the mandate to make the tough decisions. They expect the York negotiations to set the tone.

HDFS. Management considers HDFS a strategic asset, but acknowledges the need to lower its cost of capital. We'd like to see HDFS partner with third-party underwriters to drive fee income without capital risk (CarMax model). The topic of HDFS remains an insurmountable hurdle for some investors that otherwise might buy the stock – but believe the issue is diminishing.

*************** MY TAKE ON THE ABOVE ************
The analysts got a free ride on new Harley and got excited about the stock.

Management change - agree with the analyst. CEO is better than the old CEO and not afraid to cut production and fire workers. However, he can only cut cost. Revenue growth is not up to him! Economic conditions will drive the revenue growth.

HDFS - today's 5-year treasury auction happened at higher than expected yield and tresury bonds dropped. This suggests that the cost of risk-free debt is going up for borrowers. This means cost of borrowing will be going up and probability of HDFS lowering its cost of fundings is even lower. They can sell-off or spin-off HDFS but that would require the company to take a big hit right away as no buyer would come and buy HDFS without marking to market the loan book. So this is not an easy option and will only hurt the book-value of the company.

One can only go so far by cutting cost. Profit growth can not come if revenue growth does not come. Too much hope is priced in the current stock price.

Harley-Davidson in the Mire and Likely to Stay There

YOUR COMMENT PROMPTED ME TO CHECK THE GS ANALYST REPORT ON THE DETAILS AND I LIKE TO SHARE WHAT I READ.

JIM CRAMER MISSED TO READ OR COMMUNICATE THE DETAILS OF GS REPORT. WE NEED TO REVIEW GS ANALYST'S COMMENTS FROM JULY 13th and JULY 20th.

FOLLWING IS THE NOTE SENT BY GOLDMAN SACHS’ ANALYST, PETER ARCHAMBAULT ON JULY 13th:
Adjusting EPS for lower production and cap structure changes

What's changed

We are lowering our 2010/2011 EPS estimates to $1.74/$2.24 from $1.88/$2.42 to reflect a better HDFS funding outlook offset by lower production expectations.

Implications
We think HDFS remains loss making in the short term but the outlook is improving. After the extension of the 364-day facility and asset-backed conduit, and given the two recent ABS deals, HDFS is positioned to benefit from a less-expensive short-term funding mix than we had modeled, and we have increased our 2010 and 2011 HDFS profit forecasts to reflect this.
But weakening motorcycle demand is a big offset. On our new numbers
we see a better HDFS being offset by a deteriorating outlook for retail sales
and production in the US, which we have revised down for 2010 and 2011
to be consistent with the GS Global ECS team’s forecast for a tepid PCE
growth recovery as consumer balance sheets deleverage.
We think 2Q09 is likely to be difficult and we would be sellers into
Thursday’s results for three reasons. (1) We believe the shipment guidance
of 264k-273k is too high and that Harley’s new CEO may take the opportunity
lower or remove it. (2) We expect a 30% decline in US retail sales for the
quarter, which we see as below already low Street expectations. (3) 3Q09
earnings are likely to be hit by a one-time provisioning expense associated
with the reclassification of assets related to the 5/5 ABS transaction.

Valuation

We are maintaining our six-month price target of $11, which reflects a 9X
multiple applied to our unchanged 2009 EPS estimate of $1.22. From a
multiple perspective, we see the lower out-year EPS growth outlook as
offset by a better risk profile from improved funding options at HDFS.
Key risks
The main upside risk to our price target is a rally in consumer discretionary
names of the back of a continued improvement in credit.


AFTER THE EARNINGS, THE STOCK SHOT UP>

THE SAME ANALYST CHANGED HIS TUNE ON JULY 19th AFTER THE STOCK SHOT UP. SELL-SIDE ANALYSTS CAN NOT AFFORD TO BE TOO WRONG AND CAN NOT RISK BEING TOO FAR AWAY FROM THE CONSENSUS SO THEY WILL CHANGE THEIR VIEWS OVER-NIGHT. PETER IS A SMART KID BUT HE CAN’T STAND THE HEAT ANYMORE OF BEING WRONG ABOUT THE STOCK PRICE. I THINK HE STILL BELIEVES THAT THE BUSINESS MODEL IS UNDER PRESSURE. HOWEVER, HE IS JUSTIFYING THE STOCK’S MOVE UP WITH REDUCING RISK PREMIUM ASSIGNED BY THE MARKET TO THE BUSINESS OUTLOOK. INFACT, HE HAS REDUCED HIS EPS ESTIMATE EVEN FURTHER BUT HAS INCREASED THE TARGET P/E MULTIPLES AND RAISED THE TARGET PRICE TO $20 from $11. JIM CRAMER’S COMMENT DID NOT INCLUDE THE FACTS THAT THE ANALYST HAD REDUCED THE EPS ESTIMATES AND RAISED THE TARGET P/E MULTIPLE.

FOLLWING IS A NOTE FROM THE SAME GOLDMAN ANALYST ON JULY 20th:

"
Raising HOG to Neutral, difficult fundamentals largely discounted
What happened
We are upgrading shares of HOG to Neutral from Sell. The change reflects:
1) our view that that post very weak 2Q09 results and dramatically lowered
guidance, expectations have been set very low (as evidenced by the
stock’s 8% rise on the result), and 2) with refi risk significantly diminished
we believe investors are taking a longer-term view of the shares. Our new
price target of $20 based on normalized earnings suggests shares are fully
valued even looking longer-term. Since adding HOG to the Sell list on Jan
27, 2009, shares have risen 56% vs. 11% for the S&P 500. Over the last 12
months the shares are down 51% vs. down 25% for the S&P 500.
Current view
While we anticipated the poor quarter we underestimated the extent to which
the market had already discounted these factors, and with investors willing to
look to beyond 2009/2010 in valuing HOG, we see fewer opportunities for weak
fundamentals to significantly pressure the shares. Our new 09/10/11 estimates
of $0.61, $1.30, and $1.72, vs. $1.22, $1.74, and $2.24 reflect a lowered outlook
for vehicle shipments in ‘09 and for out-years based on reduced retail sales
expectations as well as lower inventories. This is consistent with a 50% peak to
trough decline in HOG retail bike sales, in keeping with the largest contraction
in HOG’s history from 1979 to 1983. We have also lowered our ‘09 HDFS
earnings forecast but increased ‘10 and ‘11, reflecting the full accrual of an HFI
reserve adjustment taken in 2Q09 that we thought would occur over time. We
now value HOG shares by applying a 12x multiple to our normalized EPS
forecast of $1.67 (vs a 9x multiple applied to our 2009 EPS estimate previously),
bringing our 6-month PT to $20, from $11, implying 6% potential upside. Our
12x multiple is near the bottom of HOG’s traditional trading range reflecting
further downside risk to our US demand forecast given the over-extension of
bike sales over the last decade, which is partially offset by further upside
potential from cost performance and restructuring under the direction of a new
CEO with strong manufacturing credentials. Upside risk: A further expansion in
multiples on which consumer discretionary names trade. Downside risk: A
further cut in guidance due to a prolonged weakness in demand.

******
SO I FEEL THAT THE UPGRADE TO NEUTRAL FROM SELL IS BASED ON MARKET SENTIMENT AND NOT IMPROVEMENT IN THE BUSINESS CONDITION OF HARLEY.


On Jul 23 02:40 PM Janet G. wrote:

> You did not mention in your article that on July 20, Goldman Sachs
> upgraded HOG stock from "sell" to "neutral." Over at StreetInsider.com,
> they are saying "the difficult fundamentals are now largely discounted.
> (seekingalpha.com/symbo...) also said with refi risk significantly
> diminished they believe investors are taking a longer-term view of
> the shares."
>
> What, if any, impact do these statements have on your assessment
> of HOG?

Harley-Davidson in the Mire and Likely to Stay There

Davis funds and Warren Buffett have subscribed to $300 mm each of 2014 unsecured notes at 15% annual coupon rate in Feb. Davis has owned the shares for long time and own 3-4% of the company (and probably deep out of the money). Buffett does not own any equity stake. $600 mm at 15% rate saved the day but can it save the year is the question. Jim Cramer's comment on Buffett's involvement in Harley today is little stretched as Warrne has not subscribed to any equity or warrants.

Harley-Davidson in the Mire and Likely to Stay There

As mentioned in the recent conf call, the sub-prime portion is at 15-20% of the loan book (vs 25% a year ago). As loan book grows, and assuming HDFS' underwriting ability keeps incremental sub-prime loans in check, the sub-prime/loan book ratio would drop. However, in the absolute terms, the dollar value of the sub-prime $750 mil -$1 bn will not go down as things are not going to improve over-night. Assuming 20% write-off in sub-prime portion over two years will equal to $150 mm - $200 mm write-off against profit eventually. NOT A SMALL NUMBER! That would be $1.50-$2 per share hit on the book value of ~$10 per share and could wipe-out a year's worth of EPS. The company is buying time with accounting changes but sins will catch up.

TALF was helpful at dealing with short-term funding needs but that "cheap" money will not be there for HOG forever. HOG is essentially buying revenues with its own (borrowed) money and as long as net interest margins are positive, HDFS will be safe but looking at the state of economy, the probability of that is lower.

The best way to value this stock is to divide the manufacturing business and financing business and do a sum-of the-part valuation. Unfortunately, the company dose not break-down its balance sheet every quarter to give true picture of its financial health. HOG can't survive without HDFS and good probability that HDFS can blow up. This company should be split into two components for the sake of Harley lovers. Restructuring is required here soon or later to avoid a disaster.

I think the stock is holding up as institutional investors continue to allocate cash held on side line to consumer cyclicals to play catch up. Once the money flow slows and institutional money gets diverted to other sectors, this stock should correct. The sell-side brokers are not increasing EPS estimates but now lowering risk-premium and expanding their assigned P/E multiples to chase the stock price and upgrading the stock but the success rate of sell-side is 50/50 and they are usually clue-less anyway.

I think short-squeeze is already going on in this name. 18% short interest is relatively high and more fresh shorts are not going to come to hammer this at this point. Once the squeeze is over (volume has dropped today by 40-50% relative to last three day average), expect the stock to stabilize and start moving closer to the moving average. Until then, shorts will not get paid. If we look at the mid-point price for the day, the stock has gone up for 11 straight days from the bottom of $15.11 to $20.20 (up+35%). Higher beta is helping the stock price move as the has gone up for 7-11 days, depending on which index one refers to.

DISCLAIMER: I started shorting at $17.50, (the day before the results) and have a fairly large short position at avg cost of $18.96 and bought AUG 20 puts at $1.12.

Earnings Preview: Harley-Davidson

Market did not care.. EPS was not too bad. P/E expansion is the topic of the day. The stock hit 20.5 today and I am buying AUG 20 puts. 11 straight days of +++ve market move will end soon.

Forward Industries: Cheap and Attractive

Given that no single investor owns enough shares to boot the management out, it will be difficult to see any +ve changes coming from the management. They will continue to pay themselves salaries and bonuses and suck the blood out. Risk risk and no reward situation here.

Earnings Preview: Harley-Davidson

EPS was 8 cents vs expectation of 25 cents. The stock is up 7% at 18.80. Not logical. Short short short......

Net income of $19.8 million and diluted earnings per share of $0.08 were primarily affected by the planned 27.6 percent reduction in motorcycle shipments compared to the year-ago period and by two non-cash charges related to HDFS: a $72.7 million credit loss provision for a one-time reclassification of motorcycle loan receivables; and a one-time $28.4 million charge to write off the total goodwill associated with HDFS.

Worldwide retail unit sales of new bikes were down 30.1 percent compared to the year-ago quarter. Retail new Harley-Davidson motorcycle sales in the U.S. were down 35.1 percent and declined 18.2 percent in international markets compared to last year’s second quarter. Industry-wide retail sales of heavyweight motorcycles in the U.S. declined 48.1 percent for the same period.

In light of the decline in retail motorcycle sales, the Company also lowered its 2009 shipment expectations for Harley-Davidson motorcycles. The Company now plans to ship between 212,000 and 228,000 Harley-Davidson motorcycles to dealers and distributors worldwide in 2009, or 25 percent to 30 percent fewer than the 303,479 shipped in 2008. Prior 2009 guidance was for shipments of 264,000 to 273,000 motorcycles. In the third quarter of 2009, the Company expects to ship 52,000 to 57,000 Harley-Davidson motorcycles.

As a result of the lowered shipment volume, the Company will implement a further reduction this year of approximately 700 positions in the hourly production workforce. Harley-Davidson will also be reducing the non-production, primarily salaried headcount by an approximate 300 additional positions, including a reduction at HDFS. The Company plans to offer a voluntary separation incentive package to eligible salaried employees. Earlier this year, the Company had announced workforce reductions totaling about 1,400 to 1,500 hourly production positions in 2009 and 2010 and about 300 non-production, primarily salaried positions.
The Company continues to expect full-year gross margins to be between 30.5 percent and 31.5 percent.
Harley-Davidson Financial Services recorded an operating loss of $62.1 million for the second quarter, compared to operating income of $37.1 million in the year-ago quarter. In addition to the effects of the finance receivables reclassification HDFS recorded $15.0 million in writedowns on retained securitization interests due to expected higher credit losses compared to a $6.3 million write-down in the year ago period. For the first half of 2009, HDFS reported an operating loss of $50.9 million, compared to operating income of $72.1 million for the prior-year period. In addition, the Company wrote off $28.4 million of goodwill associated with HDFS.
The Company’s second-quarter effective income tax rate was 71.6 percent, compared to 36.0 percent in the same quarter last year. This increase was due primarily to the non-deductible goodwill write-off and the tax implications of MV Agusta, which the Company acquired in August 2008. The Company expects its full-year 2009 effective tax rate to be approximately 55 percent due to the items listed above as well as the previously reported one-time tax charge of $22.5 million in the first quarter of 2009 and the implications of reduced shipments on earnings for the remainder of the year.
Cash and cash equivalents totaled $1.03 billion as of June 28, 2009, compared to $803.4 million at the end of the year-ago period. Cash used by operations was $164.4 million and capital expenditures were $57.3 million during the second quarter of 2009. For the full year, capital expenditures are now expected to be $145 million to $175 million, including $20 million to $30 million related to restructuring activities.

Earnings Preview: Harley-Davidson

Note: Contains spelling errors

I am shorting this ahead of the earning tomorrow.

The stock is up 6% today hitting 17.70. My shorts are at avg of $17.46

My thoughts:

* Main reason: New CEO would want to start with a clean slate. I expect them to revise down the shipping target or he will stop giving targets. Unit shipped will be revised down and earnings will come weak. Holding on to the shorts beyond 3Q will depend on what they announce tomorrow.
* TALF is helping them as HOG benefits from a less-expensive short-term funding mix but pushing sells by providing financing to potential customers can't push the sales up forever (reminds me of GMAC led GM disaster!). Their customers are loyal but I expect consumers to reduce leverage given the economic uncertainties.
* Look out for a one-time provisioning expense hit in the second half of theyar wiht th reclassification of assets related to the 5/5 ABS transaction.
* International demand is not improving or heklping to make up for loss of sales in the us.
* High debt/equity at 180-190%; although I don't expect them to have difficulties raise more funds.
* Unit shipment showing no improvement - visit their IR site to look at the unti shipment data
* Buell - disaster! Has not picked up sales.
* Rising unemployment pushing down the prices of used-bikes.
* HOG finances its sales to consumers - expect additional writedowns to the retained interest
* Last quarter's sales were decent only because of its sportster trade-up program.

* FY09 Financials
Revs: $4.5 bn, GP $1.4 bn, OP $0.54 bn, $0.05 write-downs in financing business, 40% tax rate = Net income $280 mm or $1.20-$1.25 EPS

* Stock trading at 14x FY09 with degrowth in EPS FY09/FY08. Harly is a great brand and one can assign some value to it but zero or negative growth business in the medium term with book value per share of $10 makes this look pricey.

Risk to my short call:
* discretionary consumer names do well in terms of announcing 2Q EPS and revising up 2Hfy09 guidance. This could suggest higher consumer confidence.
* improvement in consumer credit availability as almost 100% of HOG's sales are financed. However this is a longer tiemr risk to the short call.

WSJ: 5 Winners, 4 Losers in a Jobless Environment

Monster Worldwide (MWW) is another possible short for Job-less recovery theme.

Why Netflix Is a Short

I am not a Netflix subscriber as I can't speak with 100% confidence about the user-experience but I have spoken with two users in past tow days and both praised the service and one of them was very proud of being their customer for more than four years. (I have been cable subscriber for more than 13 years but only because I don't want to spend time looking for alternatives and learn to operate on a new remote control). Never the less, having lived through the hyper-growth years of mobile phone providers and on-line service providers and have witnessed what happens to stock market valuations once subscriptions reach saturation point, Netflix will become a short at some point. Netflix might not be a short candidate yet though.

Positives:
* 11 million subscribers with average subscriber growth up over 35% annually since 2005. So far they have managed growth very well. With 100k+ titles and 12k titles available for streaming in NFLX library and 55 million DVDs. Technology to manage the process works! 600,000 USPS are ready to deliver.
* EPS growth despite of tough economic conditions. FY07 - $0.97, FY08 - $1.23. Tougher economic conditions have helped NFLX as consumers have found DVD rental as a substitute to other expensive means of movie watching. These consumers will continue to remain subscribers once economic conditions improve. (if one can afford them in bad times, they can certainly afford them in good times!)
* It took a decade for DVDs to replace video tapes and will take decade for Blu-ray to replace DVD. DVDs provide longivity of product for Studios so they have become core of studio's profits so they will continue to support movie-rental businesses. in 2007, 28% of studio film revenues came from theatrical versus 54% from home video (VOD 4%, Premium TV 8%, TV 6%)
* NFLX is growing at the expenses of traditional rental outlets. Blockbuster/Movie Gallery/Hollywood revenue growth is flat for past five years while NFLX has grown from $0.3 billion to $1.36 billion with could reach $1.6 billion in FY09. Video stores are closing across America. Mom-n-pop video rental stores are almost dead!
* Potential market size is huge. Home video market is a $24 billion large. DVD rentals is ~$8 billion out of this. Video on demand is picking up and already at $1.6 billion and NFLX will be a beneficiary of this growth as well as it scales up online streaming.
* Streaming opportunity is equally promising if not even more promising. Over 99 mm HH pay for TV and 60 mm HH has broadband and 30 mm+ pay for HBO and 73 M HH have a dvd player and internet access. Streaming market is much larger than DVD rental. Ecommerce growth, comfort with the using technology, improving VOD/DVR from cable/satellite/teco is training new sets of potential customer.
* Studios will keep what NFLX spends for postage and handling so they will support success of NFLX. Content availability is growing. TV networks are comfortable giving newer content to NFLX.
* Company is working well with consumer electronics companies to come up with solutions to bring video viewing from PCs to TVs. Netflix receivers or TV sets ready-to-receive streaming will make VOD easier. Higher the share of VOD, lower the churn and DVD usage for NFLX. This is a win-win situation for electronics companies as they can promote their products to NFLX's large subscriber base and provide differentiation.
* 20 million subscribers have used it and company claims that most cancelling subs say they will return. Subscriber acquisition cost (SAC) will drops as the brand has become a household name.

Negatives:
* Blockbuster will not walk away without giving a fight. BBI has $2 bn os sales and it won't walk away easily (even if it means money-losing fight). This is a widlcard! It is possible that BBI could become a leaner "kiosk" type of company with low-price point and also scale up streaming.
* Kiosks are growing to $500-600 million in FY09 and expected to grow at $1 billion by 2011 as per Adams Media research.
* Pirate Bay, Apple, Amazon, YouTube, Hulu and Studios themselves are scaling up online and offline distribution. Improving VOD/DVR from telco cable/satellite/telco. Comcast, Apple, HBO or Amazon entering internet movie streaming.
* Departments stores like Walmart has set up a DVD rental kiosk and charge $1/day. Limited service kiosks are picking up. Too early to tell if they will survive but kiosks are already clocking $200 million+ in revenues.
* DVD shipments to peak in 2013-2018 and VOD and online streaming will become the standard. If the company is not able to fight internet companies with deep pockets and studios themselves go direct to the consumers, NFLX could lose out.
* NFLX will need to allocate large capex to install streaming capabilities, add more streaming content, manage DVD substitution, retention and fight off well established cable/telco companies who could become much fierce competitor (unlike BBI in DVD rental business)
* Streaming spend will certainly pressure P&L, causing near-term lower growth in EPS. Automation drives efficiency in DVD rental and 60% of the process is automated but can further improvement possible?
* 97% of the subs are serviced in 1 Business Day. Company claims that it can not do better than this but also can not drop the expectations either so distribution costs will not go down further.
* With the budget deficit of the US growing, expect further hile in USPS First Class Rate is all but certain. Jan-06 +5%, Jan 07 up +5%, Jan-08 up +2%


Economies of scale working and business model is becoming more stable but growth comes with price and streaming is not same as mail-order rental!
* Marketing expense as a %age of Total Revenue dropped from 24% in Q1'05 to 17% in Q1'08. Recurring revenue grows faster than marketing expense. However keep in mind that churn is natural. The current churn rate of 4%/month will require marketing costs to remain at the current levels. in 2008, Gross subs were atr 6.8 mm and cancellations were at 4.9 mm, net subs at 1.9 mm. management defines marketing as variable expense. I disagree. In this business model, it is a fixed expense. To stay in business and even to retain its subscribers, marketing expense is required evil. Fixed costs are going to remain at 27-20% of the sales. (Fulfillment expenses are at 12% and content cost is at 60%). (See the IR website for data)
* Subscriber profitability grows with the length of membership. More than 50%of the subs are greater have been Netflix subscriber for more than a year. 3/4th of the revenues coming from old subscriber versus current year subscriber in FY08
* Streaming initiative could drag margins. Digital streaming is free to subscribers resulting in new layer of fixed costs. (IF streaming is not provided than NFLX can lose business to new competition) If a subscriber watches the same movie twice, NFLX pays to the content owner twice but revenues does not go up. There are no library nebefits as content providers need to get paid at every click or for certain duration and once the time expires, NFLX has to renew the agreement.
* Streaming offering for newer titles are less compelling than cable/satellite. Newer content will cost more to NFLX.
* 35% historic growth can't sustain as the high-base effect will be seen going forward. 20% growth will equate to 7-8% EBITDA growth. Will ARPU decrease or stay stable will determine the revenue growth as subscriber growth can not come in double digit as saturation will be reached within next five years.
* NLFX gets "internet business" P/E but it's capes-sales of 17% in 2008 is well above typical internet companies and no different than Blockbuster. NLFX is a capital intensive business as it needs to maintain and replenish the DVD library.
Lifetime Value of subscriber
* Return on Capital invested is at 30% and higher than NLFX's cost of capital.
* If NLFX grows at 20% yoy, it will need to grow subscribers at 23-25% (lower ARPU by 1-2%). If EBITDA margins remain stable at 11%, then EPS would be at $1.7 in FY09 (up 27% yoy).

Valuation - for every buyer - there is a seller and vice versa. I hate to say what is the maximum price or target price but looking at the current run-rate, NFLX trades at 12x EV/EBITDA. It's peak was 18 x EV/EBITDA in 2007. The forward P/E us at 24x (which is in line with its historic avg P/E of 26x). Will market continue to assign the growth company P/E multiples if revenue growth starts to drop is the question. Also, as the economy starts to recover, the "earnings growth" premium should go down.
* Average life time of a subscriber = 1 / 4.2% = 24.1 months ( where 4.2% is the churn rate for Dec qtr) (Since 2005 average life of subscriber has ranged from 20-26 months)
* Net Present Value of current subscriber (I calculated this with help of Credit Suisse analyst who cover this stock but I find the number reasonable)
EBITDA = (ARPU * Months * EBITDA %) = 13.53*12*25.6% = $41.6
EBIT = $41.6 -D&A of $24.1 = $17.5
Unlevered Cash Flow = EBIT - Tax - Capex per sub = $17.5 - (40%*17.5) - $3.9 + D&A of $24.1 = $30.7 per sub

PV of Yr1 at 9% cost of capital = 28.3
PV of Yr2 at 9% cost of capital = 23.3 (taking two years as the life time if 24.1 months)
NPV per subscriber = $51.6
NFLX Enterprise Value = $51.6 * 11.4 mm subs = $588.8 mm (for the current 20% market share)

* Market Implied EV and subscriber market share
Enterprise Value = $2,394.2 mm mcap - Cash $275.6 mm = $2,118.6
Enterprise Value / NPV per subscriber = $2118.6/51.6 = 41.1 mm subscribers
41.1 mm subs / Total US TV HHs 115 = 35.7%
In other words, market assigns value of NFLX at 36% market share which is possible for the company to achieve but not easy without burning $200-$300 mm per year in capex.

OR other way of looking at this is, to calculate payback period for acquirer if someone was to acquire NFLX at current mcap

Cash flow per subscriber/year * number of subscribers = $30.7 * 11.4 million = $350 million per year
Assuming zero growth it will take $2118 mm/$350 mm = 6 years.

I don't think it very expensive at 6 years payback for possible acquirer but it is not cheap either. Of course I am assuming that the company will not spend any cash for capex in this scenario which is not the reality! If we look at the valuation in terms of P/FCF perspective then this is trading at 20x P/FCF and 24x P/E.

Risks to shorting -
* Higher ARPU growth - unlikely! ARPUs have faller $17.46 in 2005 to $13.79 in 2008. (Subscribers have choice of plans raning from $5 - $48 per month)
* Higher subscriber growth - possible. It is the subscriber growth rather than average revenue per user that has driven the top-line growth.
* Success in streaming video business - it will reduce fulfillment and subscription costs and could improve operating margins
* Acquisition target - capital is scarce in capital market but NFLX could become an acquisition target for a larger internet company like Yahoo, Amazon, or Ebay or media company interested in it's 11 million subscriber base and solid management team.

I will wait until the price moves up to PEG of 1.25 or higher before shorting this. NOT very inexpensive but not a short yet!

DISCLAIMER: Do not have any position and bias is toward shorts.

Obama Does Not Heart CME Group or Intercontinental Exchange

Wall Steet analysts will throw in the towels and go with the flow and will forget about long-term future of commodity exchanges. Exchanges are fantastic cash flow generating machines and essentially monopolies. However, they are also one of the most regulated businesses. More than 50% of ICE's 2008 revenues came from energy related products so the investor panic is not irrational owing to concerns around potential legislative or regulatory reform. Following the CFTC’s announcement early this week and similar announcement from Britain and France will limit the upside until some resolution in reached.

Any forced limits will give oppotunities to non-US exchanges to gain the market share as speculators will find their way to speculate. (Singapore Mercantile Exchange will be launching soon and one of their first product is crude oil futures!)