Citrus

Risk Management for All

Just a quick ancillary comment, RMG is expensive on a P/E basis but such a basis is not the ideal way to value a stock with a considerable chunk of debt. Because of interest charges the earnings are depressed and the P/E looks high. In reality RMG is cheap. Moving up the income statement, a simple but better way is to look at EV/EBITDA. Here the stock is trading at about 13 times and that's not outrageous. The debt adds risk but considering their high cash returns they'll have no problem paying it off in about five years or so when the balloon payment is due. They generated 45 million in cash in the just completed quarter, 180 million on an annualized basis or just 1/5th of the market valuation. In fact if a full comprehensive FCFF valuation is done a target of 30 is the righty target and a P/E of 87 is not unreasonabl, it's not just about the P/E for certain companies.

Is $3.25 Gas Helping Harley Davidson?

Mallarde,

Yeah good luck to you too. Interesting discussion. I am a very long term and slow (very slow) buyer so I don't worry too much about the near term. This is a small position for me and I don't think it is going to the moon anytime soon but it will be interesting to see how it plays out over the next few years. Cheers!

Is $3.25 Gas Helping Harley Davidson?

A few more comments:

An insider, a director, bought 100,000 shares in November:

finance.yahoo.com/q/it...

Harley has one of the world's best brands:

bwnt.businessweek.com/.../

They've retired close to 4 Billion dollars of stock over the past 5 years - a rate that has accelerated to 1 billion dollars of stock or so over the past 3 years - I think they should pay off some debt soon as this may be a bit too aggressive:

investor.harley-davids...

The income statements show the 20% reduction in shares (another 10+ million were bought recently per the 10-K, they now have the same adjusted shares as they did more than 20 years ago - amazing) and the strong growth in international revenues (almost doubling in 5 years):

investor.harley-davids...

Is $3.25 Gas Helping Harley Davidson?

Mallarde,

I only consider the company's subsegment as that is the only market in which it plays. Heavyweight is over 750cc and Harley uses 651cc and over in its 10-K table. If you look at Harley's margins you can see that if you can find a niche it will translate to strong cash flow.

Regarding demographics, in addition to the strong European demand (1000 basis point improvement over the last few years in market share) there is a large segment of the BRIC populations that is growing and getting ready to buy. Luxury taxes will be a problem and it remains to see how severe it will be. Certainly with 17% growth in Q4 it did not prove to be a huge gating factor. Other markets that make sense over time include the Middle East.

Regarding younger people that has been a complaint for 8 - 10 years now. Here the international cohort will help as it is much bigger than the US cohort. Over the next 10 - 15 years as the big US boomlets mature Harley should have a reasonably large cohort of buyers.

Regarding cost, the other point about low depreciation is that Harleys even though they may be not cheap up front, the net cost of these 'toys' is very low if the after market value 3 years hence is very close to the original price. Thus the owner does not have to pay a lot to use the bike for 3 years. With gas prices going up the cost increases but with good mpg it is not yet prohibitive. The cost of owning the toy is really probably not that high. The bikes are well made. And I have never seen a person unhappy to be riding a bike even if it is only for the weekend.

Finally, management that run strong companies usually don't sit still. They have the power of 'real options' to try and change strategy. I don't think they need to right now but it's their prerogative and they have a strong brand name that they can parlay into new products. I suspect if things were really bad they'd try new things. Usually when this happens and it gets ridiculous ("diworsifying") I'll know something's up. Their movement to Buell in 2003 probably was an example of such a 'real option'.

Some of the best investors of all time continue to hold HOG - Davis, Capital, and Templeton:

finance.yahoo.com/q/mh...

These guys know what they are doing and are streets ahead of the short term thinkers such as hedge funds and their ilk.

Anyway we'll find out come April the 17th just how bad the quarter was. In their end of year conference call they called for 4-7% earnings growth. Couple that with a 3% dividend and a low stock price (protected in turn by the dividend) and the stock has a chance to end up for the year.

Is $3.25 Gas Helping Harley Davidson?

Mallarde,

Re: "50% of the U.S. market share? No way is that possible." My data came from page 9 of the recently filed 10-K. I thought everyone knew that Harley was dominant in its segment! Second is Honda at 14%, third is Suzuki at 13%, fourth is Yamaha at 9%.

Median income of 84K which is relevant to Harley buyers is more relevant than 80K the number pertaining to Buell buyers because HOG gets much more revenue from Harleys than Buells. This is the 85th percentile of households in the US. These are probably people in their mid 40s, so with children probably around the teenage years on average. A 20k cycle on a 5 year amortization schedule at about 6.5% with 4k down is something like $300 a month.

Another point many people forget is Harleys generally don't depreciate all that much. So getting back to is $3.25 gas helping Harley, in general, if you can commute on a bike that gets much better mileage AND does not really depreciate that much you come out way ahead than if your choice was a decent car that did depreciate at a higher rate.

Example:

Car gets 25 mpg and loses 40% of its value in 3 years. If the car cost 20,000, and the driver drove it 20 miles round trip to work, the whole deal costs him about 280 dollars a month in gas and depreciation.

A Harley in a place in the country where it can be driven year around (so parts of FL, TX, CA) say for 20,000, and with a similar commute, costs the driver 90 dollars a month in gas and depreciation.

Thus the Harley owner is up about 200 dollars a month.

---

Getting back to current Harley sales they are probably not ideal but the bigger question is how will the stock react? Housing sucks but the housing stocks are up strongly this year. When Harley reported Q4, it gapped up at the open though it closed lower at 37 something. When Citi removed it from its list on Friday the 14th, it did not respond too negatively. It is higher now than it was during both those days.

In conclusion, HOG is probably having a difficult year but the stock reflects a lot of bad news, the dividend yield will support the stock as the yield will probably not go lower than 4 or 5%, international sales are likely very strong, the US is weak but everyone, their mother and their pet knows this by now, housing stocks and related retail stocks are going up with the recent actions at the Fed. All of these suggest the stock is closer to a bottom and it never fails to buy strong companies when blood is in the streets. After all not too many brand names I know of have the loyalty and fanaticism of Harley buyers.

Is $3.25 Gas Helping Harley Davidson?

BMW99,

The dividend will act as a floor. The company is strong financially and will not sell in the teens at which point its dividend will be well over 6%. In the current interest rate environment investors will buy the stock long before its yield hits 6%. At worst the current yield will be around 4.5% and that means the absolute lowest price is around 27.

Realistically a 4% yield is quite acceptable so 30 is about the lowest it can go before people will buy in.

I am more inclined to think the 35 range plus or minus a few dollars is the low.

2008 will be difficut but the weaker dollar will prevent it from being a disaster.

International sales have grown 50% in 2 years from around 1 billion in 2005 to 1.5 billion in 2007. European market share has jumped from 34% in 2005 to 43% in 2007. The company had a 14% drop in Q4 sales, and a 17% increase in international sales. International sales are 27% of cycle unit sales. Part of this may be because of the weak dollar.

Market share in the US has been holding steady at 50% for the past 5 years. There is some chance that foreign bikes are even less competitive now with the weaker dollar.

Dividend increased 31% compared to 2006.

The demographic is: "The average U.S. retail purchaser of a new Harley-Davidson motorcycle is a married male in his mid to late forties (nearly two-thirds of U.S. retail purchasers of new Harley-Davidson motorcycles are between the ages of 35 and 54) with a median household income of approximately $84,300."

"Buell attracts customers in the demographic age range of 25 to 55. The average U.S. retail purchaser of a new Buell XB motorcycle is a forty-year old male. The majority of new Buell owners have a median household income of approximately $80,900."

These are fairly affluent customers and not quite the same as sub-prime. They are being affected but probably not to cataclysmic proportions.

Disclosure: I am long. This is a small position. I add regularly.

Is $3.25 Gas Helping Harley Davidson?

TomS,

The article may be right in that the seller may be saving "$100 on gas a week."

The article says 40 miles 'to' work so that makes 80 miles a day.

Do this 6 days a week and that is 480 miles of commuting a week.

If a bike does 50 mpg then the gallon usage is 9.6 gallons a week on a Harley.

If he used an SUV gas guzzler getting around 12 mpg, then he bought 40 gallons of gas a week from the guzzler.

The savings are thus 30.4 gallons a week.

At say $3.25 a gallon this is $98.8 a week in savings.

All of this being said, the guy is 'selling' Harleys so he
will make the most positive comment possible.

Still I think there is some truth to this as I recall
reading somewhere that things like scooters have
taken off in the past couple of years. Yes this
is not a trend that can be extrapolated to all
Harley sales but on the margin it probably is helping
a bit.

The big picture is Harley's product is discretionary and expensive. But the company is a strong cash generating machine
and though I see troubles continuing in 2008, over time
the situation will improve. For instance, foreign
sales are very strong right now as the weaker dollar
and the iconic name have meant buyers are buying. Domestic
sales were down about 14 or 15% in Q4 2007, international
sales were up about 17%. International is still
smaller in aggregate.

I think the company is on its way to retiring 33%
of its outstanding shares when all is said and done
over the next couple of years - from something
around 302 million a few years ago to currently
around 238 million and (my guess) something
close to 200 million over the next few years. They
bought back 20 million in 2007. It looks to me like
they are parlaying a billion a year so perhaps
we get 30 million this year. (I don't know if this
much is authorized, but I suspect the company
will be aggresive in any case.)

The dividend yield is 3.3% with no threat to its
existence. In fact if I were Harley I'd perhaps
nominally increase this but keep the buybacks
coming.

Debt to fund the buybacks can bite you but
Harley should not run into major problems as
long as they don't get too silly.

I have a small long term position and continue
to buy opportunistically.