Was that a backfire or a gunshot? Either way, it looked like more than a flesh wound that Harley-Davidson (NYSE: HOG ) suffered Friday, in the wake of earnings numbers suggesting that this company is running on fumes.
Since then, the shares have made back about half of their losses. Which is funny, because about the only news we've seen since earnings came out was an announcement that investment banker RBC Capital Markets is maintaining its neutral rating on Harley, but it reduced its price target because of a lack of "confidence in management's guidance for 4 percent to 7 percent earnings-per-share growth in 2008." Apparently, investors are using RBC as a contrarian indicator on this one, and rightly so. The analyst has rated Harley a "sector performer" since April 2005 -- yet the stock has, in fact, dropped 31%, while the S&P 500 motored ahead 18%. Some performance.
So is now the time for RBC to get off the fence and include Harley on its list of predicted underperformers, alongside such names as RadioShack, Plug Power and Harley peer Arctic Cat (Nasdaq: ACAT ) ?
No. On the contrary, now just might be the time to get optimistic about Harley and make the contrarian call that things are about to get better. Here's why:
- Harley shipped 5.3% fewer choppers in 2007 than in 2006.
- Its "dollar sales" dropped only 1.3%, so it sold those bikes for higher average prices.
- Yet profits tracked unit sales rather than dollar sales, and profits dropped 4.8%, in stark contrast to competing bike makers such as Honda (NYSE: HMC ) and Polaris (NYSE: PII ) , both of which have seen their per-share earnings rise this year.
So basically, it looks as though Harley tried to juice its results by raising prices on its hogs, but in so doing, it sold fewer bikes -- and made less profit. Supporting this view, we find Harley's balance sheet loaded with 22% more inventory at year-end 2007 than it had one year before. Not good, but not unexpected, either.
Wait -- that was the good news?
In a way, yes, it is. Because as I read last week's earnings release, Harley is finally getting serious about addressing the inventory problem. Management says: "For 2008, the company once again plans to ship fewer Harley-Davidson motorcycles than it expects its worldwide dealer network to sell."
Emphasis on "plans." You see, Harley's trying to spin its bad news by implying: "Hey, sure we sold less stuff in 2007 than in 2006, but that's all part of the plan, man." Which couldn't be further from the truth. This time last year, Harley was crowing over "excellent results," "continued growth," and "impressive Harley-Davidson motorcycle sales volumes." Not a word about intending to sell fewer bikes in any of that.
But while management may be running on fumes in the candor department, I must say that it's taking the right road this time around, in terms of strategy. The only way Harley is going to dig itself out of its hole is to work down those stubborn inventories. And the way to do that is by building fewer hogs and selling off the ones currently clogging its sales pipeline. Sounds to me as though Harley has come to the same conclusion -- and it's about dang time.