One of the more poetic, if less appetizing, attributes of swine is that when hungry, they're reported to eat 'most anything. Corncobs, swill... and apparently corporate profits as well. Because as we learned this week, used hogs are eating Harley-Davidson (NYSE: HOG ) alive.
Danger! Beware of HOG!
According to a UBS (NYSE: UBS ) report, last year's tightening credit markets gave birth to a litter of hog owners turning in bikes they could no longer afford. This begat a glut of used -- but nearly new -- Harleys on the second-hand market. Which in turn has given prospective Harley shoppers a chance to buy such bikes for significant discounts.
You know how this story ends. With money tight, wannabe Hell's Angels are snapping up used bikes, thus crashing Harley's new-bike sales. Two months into Harley's second fiscal quarter, UBS estimates sales are down 35%. And because the second quarter is Harley's busiest by far, accounting for nearly two out of every five bike sales for the year, the Swiss banker believes this will have a disproportionate impact on Harley's earnings this year.
Um, exactly how "disproportionate?"
Enough that UBS cut its earnings estimate for the company by more than a third, to $0.96 per share. Enough that Citibank (NYSE: C ) , which follows the company just as closely as UBS does, downgraded the stock to "sell" last week.
And yet, the fact remains that while everyone else is consigning Harley to the scrap heap, no less an investor than Warren Buffett recently added Harley to the growing list of companies he's investing in -- a list that includes such blue-chip names as USG (NYSE: USG ) , General Electric (NYSE: GE ) , and Goldman Sachs (NYSE: GS ) . Earlier this year, Buffett's Berkshire Hathaway (NYSE: BRK-A ) bought $300 million worth of Harley debt.
Warren vs. Wall Street
So, who's got the better grip on Harley, Fools? Is it Warren Buffett, or the investment bankers?
As a Fool, I'm generally inclined to trust Buffett's judgment over that of the buffet of stock-grazers up in NYC. But in fact, this time they don't necessarily conflict. Creditors like Buffett are in Harley for the interest payments. Investors like you and me, in contrast, need to worry whether flagging sales will hurt Harley's efforts to control inventory and shore up its cash flow statement.
We'll get our first damage assessment when Harley reports earnings next month. Unless and until we learn the damage is less than feared, beware of feeding any more money into HOG. You might get bit.
Get yer investment motor running with more Fool articles on Harley:
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