Warren Buffett Revs Up Harley

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"Blue Horseshoe loves Anacot Steel."

Once upon a time, these famous words from the movie Wall Street sent shares of a fictional steelmaker skyrocketing -- but they ain't a patch on what happened when the real Wall Street learned that Warren Buffett loves Harley-Davidson (NYSE: HOG  ) .

In what would have been a humdrum announcement any other day of the week, for any other company, with any other financier, yesterday, a cash-strapped Harley announced the sale of $600 million in unsecured debt to a pair of Wall Street legends. What set it apart from other financings, though, were three things:

  • The interest rate paid on the debt: 15% per annum.
  • The market's reaction to the news -- Harley shares leapt 16%.
  • And most importantly, the people doing the buying.

Splitting the paper were Davis Selected Advisers, an investment fund run by scions of famed investor and Motley Fool hero, Shelby Davis, Sr., and Warren Buffett's Berkshire Hathaway (NYSE: BRK-B  ) . Each firm picked up $300 million in debt, making the deal (from Berkshire's perspective) about as big a deal as its November investment in USG (NYSE: USG  ) , but significantly smaller than Berkshire's higher profile moves into General Electric (NYSE: GE  ) and Goldman Sachs (NYSE: GE  ) equity.

Now, at first glance, you might not think that this would be the kind of news to move a stock 16% in a day. Taking one look at the deal, Moody's (NYSE: MCO  ) downgraded Harley-Davidson Financial Services' long-term creditworthiness a grade from A1to A2. UBS (NYSE: UBS  ) soon pointed out that the added cost of this financing will slice about $0.18 per share from Harley's fiscal 2009 profits.

And yet, the fact that everything about the deal seems negative to Harley makes the stock's reaction to the news all the more interesting. What, pray tell, could investors see in this news that's edifying?

Two things
First and most immediately, we see Harley getting a new lease on life. $600 million in new cash, plus the nearly $600 million that the hogmeister already has stashed in the bank, means that Harley can continue to burn cash at the same rate in 2009 as it did in 2008, and still not quite run out.

But as reassuring as this news is, I rather suspect that the psychological factor played the more important part. Neither Buffett nor Davis got where they are today by pouring good money into bad companies immediately prior to a bankruptcy. Investors probably think that if Buffett and Davis believe Harley will survive to repay its debts, then it will.

Foolish takeaway
I think they're right. But I also (still) think that the dividend is toast. Why is that? Read on and find out:

USG, Moody’s, and Berkshire Hathaway are Motley Fool Inside Value recommendations. Moody’s and Berkshire Hathaway are Motley Fool Stock Advisor picks. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Smith owns shares of Moody's. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 05, 2009, at 1:49 PM, bukaka wrote:

    Dudes, I got my post took down! “POTTY MOUTH”?!

    Any how, If Mr. Buffet is reading this, you need to hire me to run the HD show! I know the company well. I raced against them in the ama, I did contractor work for them and have been watching the corrupt drain the company of all of its assets!


  • Report this Comment On February 06, 2009, at 3:15 PM, BigAl123 wrote:

    Harley is a perfect match for the Oracle... everything he looks for. Strong return on equity... huge barrier to entry (try starting a motorcycle company), good management and brand loyalty (ever see a Coca-Cola logo tatooed on someones head?). Harley will survive. There's too many Baby-Boomers, like me, just waiting patiently to become Wild Hogs!

  • Report this Comment On September 27, 2012, at 7:19 PM, alexanderantonio wrote:

    Maybe Warren Buffet is right more often than most people give him credit for...

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