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Imagine a manufacturing and wholesale distribution company whose fortunes are dependent on higher-income customers with discretionary income, readily available access to credit and an optimistic view to the future. Now add a financial services component that extends credit to the company's dealers and customers.
Harley-Davidson (NYSE: HOG) is just such a company.
Harley is a classic case of a company that prospered immensely from the combination of an aging baby boomer population and a massive increase in the appearance of wealth resulting from unprecedented increases in home values and a stock market that exploded to new heights during the last 10 years.
Now that both of these bubbles have burst, HOG is feeling the impact of a recalcitrant consumer and mounting problems with the loan portfolio of its financial arm, Harley-Davidson Financial Services (HDFS).
As an American icon, Harley Davidson's line of heavyweight touring, custom and performance motorcycles is the most visible (and audible) symbol of American self-indulgence.
With 9,800 employees, Milwaukee-based Harley is likely to be experiencing the pangs of business contraction in 2009 and 2010. The company will be reporting earnings Friday, and is expected to reveal the extent to which declining sales and the tight credit markets have impacted the company.
Most analysts have dramatically reduced their price targets for the company, which had hovered around $30 for the last several months. After reaching a high of $48.05 in September, HOG has dropped dramatically to a low of $11.54 in November. HOG currently trades around $12.
In addition to the weak macro backdrop and high operating leverage, Harley Davidson is also undergoing major management changes with the previously announced departure early this year of Jim Ziemer, a 40-year employee and current president and CEO, and the sudden and unexpected departure of Sy Naqvi, president of HDFS.
Harley's balance sheet is relatively strong. The company's current ratio is 2.2, and the long-term debt-to-equity ratio is 1.27.
In its third-quarter release, the company had a price to cash earnings ratio of 3.14, near the bottom of its 10-year range of 2.83 to 31.84.
HOG's price to sales ratio was 0.57, also near the bottom of the 10-year range of 0.50 to 5.26.
Each of these ratios suggests that the stock is a buy at the current price, even in the face of extraordinarily negative forces impacting the company. The company will undoubtedly have to look at production cutbacks to rid the system of excess inventory, carry out some restructuring and may need to cut its dividend.
Harley has weathered difficult times in the past, though, and is likely to do so again.
Jamie Dlugosch is a contributor to OptionsZone.com.
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Reader Comments (Page 1 of 1)
1-23-2009 @ 10:58AM
chris said...
One thing about Harleys success is that even if they can't sell as many motorcycles as they did in the past, they will always sell motorcycles. Many of us who love these machines won't ride anything else. Oh and BTW the image for this article does not appear to be a harley, no harley I ever saw has a verticle cooling vent. Get that one right next time.