Motosceptical

Harley-Davidson Gives Investors Ample Cause to Be Cautious

This article highly underestimates the risk to Harley. The entire motorcycle industry has been dependent on easy credit for many years. Harley Davidson Financial Services is dependent on their ability to sell off the loans they originate in exactly the same way that subprime loans are sold off. HDFS is having trouble doing this. As per the 9/30/08 10-Q, they now have $2.2 billion in "Finance Receivables held for sale" vs $781 million as of 12/31/07 and $431 million in on 9/30/07. Harley has clearly been unable to offload their loans. And who would want them? Motorcycles are fundamentally a sub-prime industry. Financing will be cut way back both to dealers and customers. This will lead to lower sale. This is already being seen across the industry.

To offset this potential risk, HDFS put aside $8.0 million up from $2.0 MM in Provision for Credit Loss. $8 million in reserves to cover losses on $2.2 billion in Finance Receivables. That is well under 1%. HDFS is essentially asking us to believe that their underwriting is perfect. I can only compare that to the sign in the Harley dealership I saw yesterday that offered no money down and no interest for six months. I have trouble believing that is good lending.

Further, Harley was dependent on international growth to offset an 18% decline in shipments for the 9 months ended 9/30 compared to the previous period. With a strengthening dollar, why should we expect this to continue?

Lastly, as a motorcycle industry insider, I do not believe the Harley model is equipped to function during a long period of off sales. HD is a lifestyle brand that markets itself to 42 year old accountants who want to scare grandmas. They sell very expensive, very large motorcycles and expensive t-shirts to go along with them. The US motorcycle market has been in a persistent long term decline that the current economy has only accelerated. US consumers are going to be putting off all sorts of purchases and motorcycles are going to be one of the first to go, as they already have. If you own a harley you don't need a new one nor do you need to upgrade your current riding gear. If you don't own one the likelihood that you will buy one has declined.

The used market is flooded with bikes. In my local craigslist ads there are right now, as I write this, 136 HD motorcycles listed for more than $10,000 in the classifieds.

Harley is also one of few of what I term zombie-brands in motorcycles. Think Harley, Ducati, Vespa, Triumph, Indian, etc. These brands get bought up by wealthy enthusiasts when they are bankrupt or dead, money is pumped in, enthusiasts enthusiastically buy their product, they go public under the tutelage of Wall Street, then they eventually wither away to repeat the cycle. Harley is simply the most succesful of these at present. Harley is not, however as strong as Honda, Yamaha, and the other japanese firms. Do not be shocked if at least one of the brands mentioned goes bankrupt in the near future. It could be Harley as easily as any other.