This week's Barron's examined Harley-Davidson (NYSE: HOG) as a value play. Having written multiple posts enumerating many of the same points over the last couple of months, it seems that there is not much left to be said, except to simply lay out the Harley Bulls vs. Bears points.
The Bull story is that Harley-Davidson remains a world-class brand name, selling at a discount to its historic P/E and the average of the market. It has a high 40% return on equity, a clean balance sheet, excellent management, double-digit growth in foreign markets, and will maintain its profit margins through its carefully managed (now reduced) production cycles. It also has relatively predictable income from the sale of replacement parts, licensed products and its finance company.
The Bears think the Bulls are full of it, and that Harley's past its prime just like the Baby Boomers that continue to be the lifeblood of the company. The average buyer is a 46-year-old white male, and that market can not sustain Harley going forward. They also argue that, costing an average of $14,000, these bikes are the wrong product in a market where consumer discretionary spending is waning as talk of a possible recession lingers on.
The Bulls would counter that the Hogs are loved by a broader customer range which increasingly includes women, minorities, and youth. Barron's also mentions the fact that the Baby Boomers span two decades and that this market is not going away soon either.
I have owned HOG for the last nine years and done quite well. It pays a higher-than-average dividend that was recently raised. Harley has also been buying back shares regularly, reducing the outstanding shares by 25% over the last few years. These are signs of a strong company with confidence in its future, not one running for cover. Given that it is 40% off its highs and retrenched for what might be a leaner year ahead, this seems like a good time to buy when it is out of favor.
Harley seems to fall out of favor regularly every couple of years and then come roaring back to new highs. It is currently trading around $47 a share. It is able to do this because it makes well-tuned machines and runs a well-tuned business. If you like the sound of this tune, maybe you will take a look at it before the stock takes off again.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.
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