A Few Excerpts on HDI:
Harley-Davidson Will Ride Shorts Into the Ground
By James J. Cramer
10/16/2001 03:32 PM EDT
URL: thestreet.com
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One of the things I don't miss about the hedge fund game is run-ups in stocks that I might be short, such as Harley-Davidson (HDI:NYSE - news - commentary) .
First, let me say that my wife loves Harleys. She put me on one about six months ago and I loved it. They are definitely best of breed.
But that's not the point. A few months ago, a fellow at an unnamed brokerage house and I had a fight. He was constantly emailing me negatives about Harley-Davidson -- stuffing the channel, poor sales, etc. -- and how the stock would be a great short. I know he wanted me to write it up.
I didn't. And when the quarter was reported, and it was good -- mind you, this was the previous quarter, not the beautiful one just reported -- I let the guy have it. I said that if I were still at my old hedge fund and I was short the stock on his recommendation and it had gone up, I would have fired him.
He complained that everybody deserves a second chance. I told him that the hedge fund business doesn't work like that. I couldn't afford to be short something big and not fire the guy who pushed it if the guy had great conviction.
He told me that I would be wrong. That my logic was stupid and that I would never make big money that way. I told him, take a walk because I had already made big money and I knew what was right.
Now Harley-Davidson just reported a beautiful quarter and ratcheted up its production, a sure sign of greater sales down the road. The stock is screaming. It wouldn't surprise me if it hit a 52-week high sometime soon.
Why bring this up? Because again, it has to do with how dangerous the short side is. The guy who told me that he should get a second chance probably has his whole client base short the thing.
Now his whole client base has its neck in a vise and the longs are squeezing it until the head pops off -- which should happen at $54.
And I marvel that rules like "let me give you another chance" don't work in the hedge fund world after you have blown it.
Or as I always said at the office, "One strike and you are out."
Harley's True Believers Need a Deprogramming
By Herb Greenberg
Senior Columnist
10/11/2001 11:37 AM EDT
URL: thestreet.com
So Harley Davidson's (HDI:NYSE - news - commentary) earnings and revenues were better than the Street expected. By golly, listening to Tuesday's conference call, you got the impression that Harley is the best company in America.
Weak economy? Not for Harley. The only thing down for Harley, it seems, is credit losses. The mere mention of anything negative about Harley, in this column, gets the creaky old Hostile React-o-Meter spinning outta control!
It's easy to see why -- and it's not just because Harley's stock was up Tuesday by nearly 12%. Unlike the best shorts, Harley is no one-hit wonder. It's an American institution. A great American institution. It screams Americana. More than that, it's a great American brand. And great American brands make great cult stocks. Any short-seller worth his or her sanity knows better than to bet against a cult, because investors will always be willing to look the other way until the very end.
Those believers look the other way when the CEO and CFO, sitting side by side on the conference call, can't tell a questioner off the top of their heads how inventory is split between domestical and international markets. (Like they don't know that?!) The believers look the other way when the company misses analyst estimates on the performance of several lines of businesses. They look the other way when accounts receivable are up 9.6% and sales, sequentially, are flat. But most importantly, they look the other way when the company boasts that it's offering below-market rates, through its own finance company, to sell its bikes. Companies generally don't discount when business is good. If people can't get enough Harleys, why offer 4.9% financing?
Good question, and it's one nobody asked on the conference call. As is often the case on calls, questions were mostly taken from friendly analysts, who seem as ga-ga over the company as longtime institutional holders, who hopped on Harley from the first day it went public 15 years ago and have enjoyed the ride ever since. Yet Harley has also attracted (and run over) plenty of shorts, whose interest was stirred about a year or so ago by decelerating sales growth. A spreadsheet tells that story: After peaking at 24% in the second quarter of 2000, Harley's total sales growth rate had been declining until last quarter. Sales growth fell to as low as 12.7% in the first and second quarters of this year, before popping up last quarter to 19%.
Harley Downshifts on Growth
Until last quarter, sales growth had been slowing
Source: Company reports
At the same time, and this is very important, the company securitizes receivables of loans to consumers -- packaging them together and selling them as a bond-like security to institutions. The result is that the receivables get off the books and the company gets cash. It's perfectly legit, although it could be argued that it is a form of off-balance-sheet financing.
Here's what you might not know: As part of the securitizing process, the company books a noncash gain on the sale of the securitization. The company doesn't disclose the size of the gain, but estimates by some analysts are that the gain last quarter amounted to roughly the amount by which Harley beat estimates; the same thing happened the quarter before. The securitized amount is an arbitrary figure that can change at management's whim. From an earnings standpoint, it's a low-quality way to boost results. It's almost like creating a cookie jar that a company can dip into to manage earnings. Or so it seems.
That brings us back to why Harley would offer ultra low-rate financing if it's not having a problem selling bikes. It might be that the low rates would help the company win financing business away from other lenders. The more loans Harley makes, the more loans it can securitize and the more of those noncash gains it can book. It's almost as if Harley is becoming more of a finance company -- something that has tripped up many a company. I can't help but wonder whether Harley, which gives customers an extraordinarily long 72 months to pay off their loans, is really a subprime lender in disguise -- and whether they should rename it Banco de Harley. To be fair, the average loan is paid off in 22 months.
But, hey, why worry? This is Harley. Won't matter till it does. And maybe it never will.
Harley officials didn't return our calls Wednesday. As always, this column welcomes Harley's comments on the securitization and other issues. If and when they do comment, we'll pass it along.
General Partner of Seabreeze Partners and Kass Partners and
Question: What is your opinion on your Harley-Davidson, Inc. [HDI] for the short classic perception versus reality situation.
As you know, I think Harley is headed for a crash. My judgment is based upon the evidence that I have in hand that motorcycle inventory levels at the retail level are rising to uncomfortable amounts.
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