HDI short interest is up
Harley's Sales Are Born to Be Mild
By Doug Kass
Special to TheStreet.com
4/16/01 12:49 PM ET
Harley-Davidson's (HDI:NYSE - news - boards) earnings have compounded at an impressive 21%-plus annual rate over the last five years. Wall Street analysts wax enthusiastically about the company's prospects (there are no sell recommendations), expecting profit growth to continue at nearly a 20% rate through 2005.
In part, as a result of those bullish analytical views, Harley-Davidson, the world's largest purveyor of motorcycles, sells at a generous 36 times trailing earnings, 10 times book value per share, and its market capitalization of $13 billion is more than four times its annual revenue. One analyst recently wrote that Harley-Davidson was "the most compelling investment opportunity in our leisure universe."
Harley's common shares peaked at more than $50 last year, and currently sell at about $42. Despite the loss of price momentum, Harley-Davidson is still the leader of the pack in the portfolios of momentum investors such as Putnam Investment Management and the Janus Funds (the wonderful folks who own large positions in Palm, Nokia, Cisco, Palm, Corning, etc.), which each own more than 5 million shares of Harley.
I believe Harley-Davidson faces a number of challenges over the next few years -- the most important of which is the graying of the Baby Boom generation, the same generation that has been the mother lode to Harley's earnings. The Boomers now are trading in those weekends on U.S. Highway 1 for weekends with the grandkids in their new BMW X-5 sport utility vehicles. Another issue is that for several years to come, the faltering economy is unlikely to exhibit the same sort of strength recorded over the last five years. Along with unprecedented economic growth, massive wealth creation, abetted by rising stock prices, provided a strong wind behind the company's growth. No longer.
Besides tepid economic growth, several developing trends indicate an imminent slowdown in sales and profits growth at Harley-Davidson.
Harley sales are an international phenomenon. But international sales appear at risk because of the strength of the dollar. Industry and dealer contacts in Europe say that the rising dollar is pricing consumers out of the market -- and sales of BMW and Japanese bikes are gaining market share. Non-Harleys are priced some 40% less than the U.S.-made Harleys. The Japanese knockoffs sound and look very much like Harleys.
Since Harley-Davidson recognizes revenue on delivery of bikes, it is paramount to measure inventory and the turn of that inventory. Based on a consultant's survey, Harley dealers have unusually large inventories of bikes. His view is supported not only by the survey of more than 40 dealers, but also by surfing the Internet, where a number of Harley dealers maintain sites and "no-wait-list" advertisements are increasingly common. In the past, dealers have sold hogs at premiums to manufacturers' retail selling prices. I have found that many dealers are no longer selling bikes at premium prices. Used-bike prices are falling, and both new and used are readily available. And the company appears to be offering "special allocations" (read: "more bikes") to selected dealers.
Several dealers surveyed have been quick to point out that there are no more waiting lists. That wait -- from three months to two years -- seems to have gone away concurrently with the increase in inventory at the dealers ... strange? And a few dealers even offered up the fact that they were hiring sales managers for their dealerships. Sales managers? Why do you need sales managers for products that, according to Harley-Davidson management, are on allocation and have wait lists?
For decades, Harley has been the driving force behind the growth in the heavy (650+ cc engine) motorcycle segment. But in 2000 and in the first quarter of this year, Harley has consistently lost market share in the heavy bike area. Harley lost more than 3 percentage points in market share last year, which, according to the company, was due to its inability to deliver bikes. It is worthy to note that Harleys have been on allocation for the last 15 years and the company has never lost market share to this degree.
Last week Harley reported first-quarter earnings of 30 cents per share, a penny above consensus. But, according to my analysis, there was less there, there. And the company's filing gave several hints that some of those concerns I have expressed will soon be manifested in disappointing fundamentals.
A lower tax rate of 35% (vs. 36.5%) added one cent per share to reported earnings.
Overall sales growth slowed to less than 13% year over year, and units shipped grew by only 10% -- the lowest rate of growth in years. Year-over-year growth in sales was 22%, 24%, 15% and 14% in the prior four quarters. Year-over-year pure "bike" revenue slowed as well in the last few years. First-quarter growth in 1999 was 25%, first-quarter growth last year was 18%, first-quarter growth this year was less than 13%.
During the most recent three-month period, Harley delivered about 2,000 more bikes to dealers than it indicated in previous guidance. Management had suggested that every 1,000 bikes sold would add a half-penny per share (after tax) to its bottom line. Accordingly, Harley-Davidson should have added an extra penny to earnings compared to expectations. It did not (adjusted for lower tax rate).
Short-term finance receivables -- money due to Harley by dealers -- rose an eye-catching 30% year over year. This suggests, as I suspect, that Harley is stuffing its dealer channels. Receivable days outstanding grew by 14 days, or 24%, to 72 days. Cash positions declined, as Harley receivables rose.
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A final note. In my April 2 column, Sniffing Out Bad Stocks , I listed a number of warning signs that often serve as indicators of trouble. The first one was "Management that complains about short-sellers."
Indeed, the beginning of Harley-Davidson's fourth-quarter conference call began with a cry from management that short-sellers were passing on false information! Enough said. |
