Car Guy

NYT Butchers HOG

Perhaps the reason why the article failed to mention international sales growth is that it is non-existent -- International sales were down in the 4Q08, and the company just reported that international sales were down another 21% for the first 2 months of 2009 -- there was an 8-k release on it. Many of the European economies where HOG was expecting sales growth are in even worse shape than the US.

I agree that the article brougtht nothing new to light - all of these issues were already out there. But let's not ignore the fact that the company has some very serious issues ahead of it. One could argue that the article did not drill down deep enough on the HDFS i ssues which are very serious.

Harley Davidson: Plan for More Downside

jackoo: The only reason a comparison is not valid is that a car can take you to work everyday, a bike cannot. In most regions of the US, the riding season is, by definition, seasonal and the company's sales reflect that seasonality.

I agree that historically, HD's have held their value well. However, I believe that with the decline in sales and increased discounting (e.g. the Ride for Free campaign) those days are over and that HDFS will suffer for it. There are already reports of widespread weakness in residual values (and plenty of used bike offerings on ebay support that).

I also think your comment on gas mileage is irrelevant. I doubt people are dropping 20k on a new bike primarily for fuel economy - the payback would be awfully long. In addition, with the decline in gas prices, fuel economy is no longer at the top of consumer mindset as can be evidenced by the recent fall off in sales of fuel efficient cars.

Harley Davidson: Plan for More Downside

The average selling price that the author cites is actually the average WHOLESALE selling price to the dealers. The average retail price is in excess of $20,000, which only adds to the argument for the discretionary nature of these products.

In response to gac1innj: You, as well as most other HD owners are quick to point out the strength of the Harley brand, and the appeal of the Harley "lifestyle". While I agree to a certain extent, I believe there are several issues facing the company which will overwhelm these positives:

1) In an environment where auto sales are down 35% and the scrappage rate for cars exceed the purchase rate, you have to ask yourself whether the company's projections for just a 10-13% decline is realistic. A motorcycle is far more discretionary in nature than a car, and I believe that the US consumer is entering a new era of austerity where frivolous purchases such as that of a Harley will be down dramatically. For starters, the company recently acknowledged that International sales were down 21% in the first 2 months.

2) HDFS, the company's captive finance company, played it very loose during the credit bubble -- 25% of their portfolio is subprime and obviously big concerns about the potential default rate and residual risk. The fact that the President of HDFS recently quit (not to mention the retirement of Harley's CEO) only adds to the concern.

3) The company recently issued bonds to Buffet and their biggest shareholder yielding 15%. No company with decent prospects has to pay 15% to borrow money. And the proceeds are to be used by HDFS for funding purposes which will no doubt be losing out on the negative interest rate arbitrage.

Best case, I see the company earning maybe $1.45 in 2009. With so many issues confronting the company, its difficult to ascribe anything higher than a 6x multiple to it, which suggests a price of $9, best case. After this bear market rally runs its course, I believe HOG shares will resume their trend downward.

Earnings Preview: Harley-Davidson

The market has been surprised by mention of 20-25% sales declines, but I'd be surprised if they hold up even that well. Overall auto industry sales were down 35% in the 4Q, so one would think luxury motorcycle sales would be down at least that much given their discretionary nature. In addition, 2/3 of auto demand is driven by the scrappage rate or replacement demand -- motorcycle sales don't have that kind of support.

Dividend has also got to be at risk. The $1.32/share dividend costs them >$300mm annually. Assuming a 25% sales decline, I calc they can only generate $400mm in net income (while not generating any cash), so the dividend has got to be reduced if not totally eliminated.

In the company's defense, I find it amazing how profitable they once were (gross profit of over $6k per bike!) and commendable that they are able to generate any profit at all assuming a 25% sales decline. With all the operating leverage, you just don't see that kind of profitability in the auto industry. However, I think Street expectations for HOG's top line and profitability are still too optimistic. I can't see them earning more than $2.00 in 2009 and tend to agree with GS that it could be as low as $1.43.

Harley Davidson's CEO to Retire: Car Czar Next?

I'd be interested in hearing the investment thesis for your long position in HOG (and perhaps for GE as well). Disclosure: short HOG. No position in GE.

Quick short thesis: Earnings estimates are too high -- most estimates out there imply top line decline of 5-10%. Conversely, the auto industry has seen declines of 25-35% the past few months. HOG sales are likely to fare worse as they are more discretionary in nature. HOG dealer in Santa Cruz, CA that recently shuttered reported sales declines of 70% -- that sounds more realistic to me.

Exposure to subprime loans and payback from aggressive lending practices is the other shoe to drop.

Potential funding issues at HDFS is yet another ticking time bomb.

Good luck!

Harley Davidson's CEO to Retire: Car Czar Next?

I'd be interested in hearing the investment thesis for your long position in HOG (and perhaps for GE as well). Disclosure: Short HOG. No position in GE.