Harley-Davidson: Bears vs. bulls
Profits are down and sales are in a slump, but the stock has been revving into high gear lately.
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| The bear: Joe Hovorka of Raymond James |
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| The bull: Philip Gorham of Morningstar |
| MMA | 0.95% |
| $10K MMA | 1.03% |
| 6 month CD | 1.06% |
| 1 yr CD | 1.53% |
| 5 yr CD | 2.55% |
NEW YORK (Fortune) -- Weak consumer spending and frozen credit markets are making a rough ride for Harley-Davidson.
On Thursday the iconic motorcycle brand said first-quarter profit fell 37% to $117 million from last year as it sold fewer bikes and cut production. The company said it would cut at least 300 more jobs after it announced 1,100 cuts earlier this year.
While results beat analysts' downbeat expectations and sent shares up by more than 10%, the real story is what's in store for Harley down the road. With aging buyers and diminishing sales, the ride looks like it could get a little rougher.
We asked two analysts for their takes on Harley-Davidson: Is the stock a smart value play, or is it still too risky to buy HOG (HOG, Fortune 500)?
"The stock has had a big run, going from $8 in early March to $19 today. But the important point is the credit markets, because most of these bikes are financed. In the past six weeks, all the data suggest that liquidity is actually contracting for Harley Davidson's financing arm, HDFS - not increasing.
"The best example of that is the $600 million raised in February. The company had to pay 15% interest on the loan from Warren Buffet's Berkshire and Davis Selected Advisers. That was raised through Harley Motor Company, but it was clearly for HDFS.
"HDFS now has to restrict credit availability to retail customers - the lowest credit quality customers first. And in February 2008, the latest this information was available, 25%-30% of Harley's customers were subprime.
"That can only translate into lower retail sales and therefore lower production volumes for Harley. We expect an 18.8% full-year decline in bike sales in 2009.
"The market is trying to tell Harley-Davidson Financial Services that the model that had worked a couple of years ago is no longer does, and something needs to change.
"In addition, recent discounts on bikes have a lot of impacts. A couple of years ago, you just didn't discount a Harley. There was a mystique about the Harley brand. They were somewhat difficult to get. What started as a $500 free gas card gradually moved to giving buyers $1,500 off a bike.
"Today, bikes are selling at a discount to [manufacturer's suggested retail price] and used bikes have rapidly depreciated over the last few years.
"Now a buyer is almost never above water on the loan. So if he does lose his job, he doesn't have the option of selling his bike and paying off his loan because his bike is worth less than he owes.
"Harley-Davidson is a great brand, it's a great company. But it's just in a difficult situation."
"We're expecting a very tricky year in 2009 for Harley-Davidson. The stock's not for the faint-hearted. Sales will fall almost 20% this year. But I've factored in quite a dire scenario into what the stock is worth, and it looks cheap. And in the longer-term, we're expecting something of a recovery in 2011.
"Harley's market shares have been stable for quite a few years and the brand appears to be intact. It's so strong that I don't see any weakening of its bike pricing in the long term.
"We think there may be a little bit of pent-up demand, where customers who would maybe have bought a bike by this year or last year but postponed the purchase because of the weak economy. Still, we predict sales don't rebound until the first half of 2011, with an increase of 5%, before fading to a long-term annual growth rate of less than 3% by 2013.
"In the short-term, of course, Harley needs some funding to get through this year. But it's hard to imagine that a company with the brand strength of Harley won't get the funding. There may also be government funds available to help out through the Troubled Asset Relief program.
"One positive note is Harley's new CEO Keith Wandell. He brings international and operations expertise, two areas crucial to Harley. Harley is in an environment where it might have to right-size its operations because of its aging demographics. And international growth will be crucial to Harley going forward because it's really under-penetrated in almost all overseas markets where Harley lags Japanese competitors like Honda and Suzuki.
"I think the stock looks cheap on a number of measures. Its price to earnings ratio is six.
"Sometimes the market presents investors with an opportunity to buy a great firm on the cheap, and that has been the case with Harley." 
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