View Full Version : Q3 2010 Harley business analysis

21st October 2010, 15:36
This guy misses a few things, but anyway, thought I would pass it on.

Is Harley's Chrome Losing Its Shine?
Posted: Oct 21, 2010 13:55 PM by James Brumley
Is the icon of American-made motorcycles a victim of a nagging recession, or just a victim of time? Some may argue it's not a victim at all, given last quarter's earnings from Harley-Davidson (NYSE:HOG). Harley earned 38 cents per share in third quarter of this year, well up from last year's Q3 earnings of 11 cents. Not bad. Once again though, the fine print is still ultimately a recipe for pain. (To learn about how to play the earning season, see Strategies For Quarterly Earnings Season.)

IN PICTURES: How To Make Your First $1 Million

Harley isn't selling more motorcycles. In fact, the company is selling considerably fewer than they historically have - and the number is getting smaller. Revenue has fallen every year since 2006, despite Q3's revenue being up from the equivalent quarter a year ago, and the company expects to ship 7.2% fewer bikes in 2010 than it did last year.

So how did it muster more than a triple in its bottom line last quarter? The bulk of the improvement - as was the case in Q2 - is coming from the financial services unit, and it's a dramatic contribution to the bottom line mostly because the unit was such a poor performer last year.

How dramatic? The $51 million in income the financial arm pulled down last quarter is a 180- degree turnaround from the $31 million loss in Q3 of 2009. That makes up 57% of last quarter's $89 million earned, which is fine, but it's not like the division will be able to come up with another $80 million swing in the future, nor can the company cut costs to the bone as it did last year. Harley has to start selling more motorcycles at some point. And that's where things get really messy.

You Sure About That?
Harley-Davidson's CEO Keith Wandell, commenting on last quarter's numbers, was quoted as saying "All of our market data and research indicates there's still a tremendous affinity for the brand and a desire to own Harley-Davidson motorcycles ... it's a matter of getting some help with the economy on top of everything else we're doing with our strategy."

Fair enough - few would argue that the economy still isn't in tip-top shape. On the other hand, some direct and indirect competition has managed to do amazingly well when it comes to drawing cash out of consumers' pockets.

Take Polaris Industries (NYSE:PII) for instance. Polaris makes ATV and other off-road vehicles, versus Harley's road "hogs". Perhaps it's not a perfect apples-to-apples comparison, but discretionary spending is still the key for both.

Unlike Harley-Davidson, Polaris Industries posted a 51% increase in third quarter earnings (without any major accounting help), and raised its full-year view in the process. It was the seventh beat in a row, and the company is on pace to record earnings.

Perhaps you could argue that the higher-ticket bikes that Harley sells are tougher to move than the lower-priced ATVs that Polaris manufactures, but it's not like consumers have been unwilling to spend on big-ticket items.

Winnebago Industries (NYSE:WGO) verifies that idea. Though still well under pre-2007 revenue levels, fiscal 2010's levels (ending on August 28) more than doubled 2009's total. And, Winnebago has managed to turn those growing revenue back into a reliable profit again, as of calendar Q1.

Boatmaker Brunswick Corporation (NYSE:BC) is another example of a big-ticker "toy" manufacturer managing to put some bigger numbers on the board. Though still on the ugly side of the scale, Brunswick's 2010 top line and bottom line are going to look better than 2009's.

Maybe It's Something Else
It's difficult to get behind Wandell's comment that the company just "needs a little economic help" when comparable companies are able to pick themselves up off the same mat. So what's the real problem for Harley? As of last quarter, that's the $51 million question. Here's an unpopular possibility - maybe the shine is wearing off all that chrome.

Nobody thinks Harley-Davidson's motorcycles are cooler looking than I do. But, between owning a hog, an ATV, an RV or a boat, I'd pick the Harley last. [Disclosure: I own none of those things.] They're fun to own, but rank very low on the cost-versus-utility scale. The raw numbers represent the typical consumer mindset, and the fact is, consumers who can afford Harley-Davidsons don't want them like they used to. Maybe even the deliberately-classic look gets old after a while. Either way, something's got to give soon.