Stock of the Day
Sep 17, 1998
Harley-Davidson: Back in the Saddle
The stock price of legendary hog maker Harley-Davidson (NYSE:HDI - news) has slumped hard in the past few months, but it
received a boost on Wednesday as two brokerage firms initiated coverage with positive ratings on the stock. Solomon
Brothers started Harley with a Strong Buy recommendation and broker Edward Jones called it a Buy, citing an attractive
valuation, earnings growth visibility and increased production capacity coming on line in the next few years.
95 year old Harley-Davidson is one of the great American success stories, coming back from near bankrupty in 1985 to make
motorcycles that now have a cult-like following. It's been quite a success story for investors, too, with the stock up 250% in
three years before peaking in July at $42. Harley slipped below $30 at one point during the recent market sell-off, though,
possibly giving long-term investors a chance to climb on at a reasonable valuation.
Harley is in the midst of an ambitious yet sorely-needed expansion of production capacity. For the past several years demand
for the hogs has substantially outstripped production, by 25-40% according to some estimates. Dealerships have commanded
50% markup on Harleys. The company certainly doesn't want to return to a situation like the mid-eighties when inventories
piled up and nearly brought the company down, but they also want to capitalize on the excess demand and expand sales in
Europe and Asia. They already have two new plants that came on line in the US this year, and Harley recently announced plans
to establish some assembly operations in Latin America to get around the high tariffs there. The plan is to expand production
capacity nearly 100% over a seven year period.
The booming demand for Harleys reflects a dramatic shift in the demographics of motorcycle enthusiasts in the past decade.
High-income, well-educated baby-boomer professionals represent the new breed of adventure seekers. These potential
customers have alot of disposable income just waiting to be plunked down on a new hog or set of leathers. Sales have no
doubt benefited from the strong US economy and soaring stock market in recent years, so the recent economic jitters and
market correction really pulled the rug out from under Harley's stock price. Nonetheless, analysts remain high on this
company's growth prospects. Since demand for the bikes outstrips supply by so much, analysts see the growth outlook more
dependent on the successful expansion of production capacity.
The consensus forecast is for 19% growth in earnings per share this year and 21% in 1999. 14 of the 15 analysts following this
stock have a Buy or Strong Buy rating on it. With the recent slump in its stock price, Harley is now trading at 24.6 times 1998
earnings and 20.4 times 1999 earnings. Some analysts make the case that Harley merits a premium valuation because of how
reliable its earnings outlook is. Certainly in times like these, when there is such uncertainty about future earnings growth for most
stocks, dependability is prized.
The strong stock performance of Harley-Davidson in recent years is tied in part to the solid sales growth and aggressive
expansion plans, but with a company like Harley-Davidson it's difficult to figure out where objectivity ends and emotions take
over. That's the hook when it comes to the insatiable demand for bikes like Fat Boys and Dyna Glides--it's not a purchase
made on practicality, it's all about lifestyle and passion. Every marketer dreams of having that kind of consumer devotion. Even
better, it's a consumer that probably invests actively, so the product devotion encourages stock ownership and vice versa.
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