interactive.wsj.com
June 26, 2001
Harley Is a Smooth Ride
Despite Bumpy Market
By DWIGHT OESTRICHER
Dow Jones Newswires
NEW YORK -- The economic slowdown, which has made many stocks
come to a skidding halt, doesn't seem to have even been a bump in the
road for Harley-Davidson Inc.
Shares of the Milwaukee motorcycle
company have been flirting with their
52-week high of $50.63 set Sept. 15, rising
to $49.08 Monday. The company is
expected to earn 35 cents a share in the second quarter, according to
Thomson Financial/First Call, up from the 29 cents of a year ago and the
30 cents of the first quarter. In 2001, earnings are expected to come to
$1.34 a share, rising to $1.56 in 2002, compared with $1.13 in 2000.
"We are looking at a world right now where visibility on earnings is
challenging," said Robert Shoss, AIM Large Cap Growth Fund
co-portfolio manager. As of March 1, AIM Management Group had 8.5
million Harley shares, according to Thomson Financial/Carson. "And here
you have a company that is expected to grow its bottom line by 20% and
its top line by 15%" in the next 12 months.
Strict control over production and inventories, coupled with a spike in
industry demand from a baby boomer population willing to spend their
discretionary money on Harleys, contributed to the upbeat outlook, said
analysts and investors.
"You would think that with the economy feeling pain and unemployment
going up, that demand for motorcycles wouldn't be strong," said Mr.
Shoss. "And demand has slowed a little from last year. But demand is
always higher than supply."
"People don't buy Harleys because they want transportation," said analyst
Bill Hyatt of Northern Trust, which held 4.9 million Harley shares as of
March. "It's a buying decision based on what image the consumer wants to
project, what lifestyle they want to have."
"Harley-Davidson buyers are loyal to the brand," said Ralph Wanger,
portfolio manager of the Liberty Acorn Fund. "Once you have the Harley
logo tattoed on your bicep, you can't go around riding a Kawasaki."
Harley started the year estimating that it would ship 225,000 motorcycles,
up about 9.8% from 205,000 in 2000, but it has increased that figure a
couple of times since, said Mr. Hyatt. In May, the company said it's
preparing to expand its production capacity.
"They are conservative with their production, so there isn't an inventory
build-up at the factory or in retail channels," Mr. Hyatt said.
Favorable Demographics, Overseas Opportunities
Harley-Davidson defined its average consumer as a married male,
mid-forties, making about $78,000 a year. Given that the baby boom
generation is so large, demographics favor the company, analysts and
investors said.
Where the automobile industry has had to offer rebates to sell cars,
Harley's touring and custom heavyweight motorcycles carry suggested
retail prices of $5,595 to $18,980 but sell above list prices. Those prices
usually hold true for consumers on a waiting list for their motorcycles, said
Mr. Hyatt, explaining that in-stock bikes carry a premium -- an example of
how the company "engineers" supply and demand. The company's Buell
line of sport bikes are priced lower, are smaller and lighter than
heavyweights, and are designed to attract new, younger riders.
Harley could expand its profit margins next year on sales of custom bikes
marking its 100th anniversary in 2003. Custom bikes make up about 50%
of total sales and are the highest-priced Harley line, said Bank of America
Capital Management analyst Kathryn Rapp.
In the U.S., Harley-Davidson has about a 50% market share, but only
about 7.5% in Europe and about 20% in Asia-Pacific, which means there's
opportunity for growth in international markets, said Ms. Rapp.
Harley-Davidson is continuing to focus on expansion and improvement of
its distributor and dealer relationships in Europe, according to its latest
annual report. In addition, Harley said it continues to maintain and grow its
business in southeast Asia, where markets stabilized over the last year. The
company said it remained cautiously optimistic about the long-term
opportunities in Asia.
The sales and earnings performance of Harley-Davidson in the first
quarter, the earnings outlook and excitement about its 100th anniversary
have all contributed to investor interest. Year-to-date, the stock is up more
than 21%, compared with a more than 7% decline in the S&P 500, Ms.
Rapp said. Harley-Davidson trades about 30 times 2002 earnings on an
earnings growth rate of about 20%. In addition, in May, Harley boosted its
quarterly dividend to 3 cents a share from 2.5 cents.
"You pay a premium for Harley's growth rate versus the 8% for the S&P,
in which I don't have as much confidence," Mr. Shoss said.
Not every investor has an upbeat outlook on Harley-Davidson. The short
interest in the stock stood at 15.3 million shares as of June 15, down from
the 18 million of May 15. Harley-Davidson has about 302.4 million shares
outstanding, with a float of 257 million.
Mr. Wanger, noting that the stock trades at about 40 times trailing
earnings, said a case could be made that the stock is overvalued.
"But usually you short a stock where you think business will get worse, but
that's not the case with Harley-Davidson," he said, noting that the company
carries profit margins of about 34%. Liberty Acorn fund holds about 1.5
million Harley-Davidson shares, he said.
Despite the run-up in the shares, there's still room for improvement. Ms.
Rapp said investors who will be forced to buy the stock to cover their
short positions could cause a spike in the shares. The 100th anniversary
may be coming in 2003, but the festivities have started early for dealers.
They must show the kind of sales figures that will make them eligible for an
increased supply of 2003 bikes, which will be shipped in the summer of
2002, Mr. Hyatt said.
Write to Dwight Oestricher at dwight.oestricher@dowjones.com
KJC |
