Harley Gets Creamed

By Rich Smith (TMF Ditty) | More Articles
January 25, 2010 | Comments (4)

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

"Harley-Davidson (NYSE: HOG ) swings to wider-than-expected loss." So opined Reuters on Harley's fourth-quarter earnings. And yes, the numbers were bad:

Sales dropped 40% for the quarter, putting a cap on the year's 23% decline.
Profits rolled over, as last year's $0.40 Q4 profit turned into this year's $0.63 loss, closing out the year with a 90% decline in profits -- $0.30 per share.
And in response to the tough sales environment, Harley expects to cut bike shipments by 5% to 10% in 2010.

But was anyone really surprised by the news? Perhaps the analysts at Citigroup (NYSE: C ) were. Last I checked, they were still insisting Harley had turned the corner. In contrast, the folks at Goldman Sachs (NYSE: GS ) are looking pretty smart this week, having warned us of Harley's troubles before they happened.

Surprise!
If truth be told, I was surprised, too -- but pleasantly so. Just three months ago, I remarked on the unprecedented level of cash Harley generated in Q3. But seeing as "historically, Harley has burned cash in the year's final quarter," I predicted that come Q4, we'd see that cash flow evaporate.

Well, news flash: It didn't. To the contrary, Harley ended the year with $609 million in "cash provided by operating activities," or nearly $100 million more than it had produced as of Q3. How'd they do that? For one thing, Harley slashed inventories 25% since the end of last quarter. Converting steely chrome bikes into cold, hard cash certainly helped to boost cash flow.

When you combine the inventory liquidation with Harley's 53% reduction in Q4 shipments, and tack on a further 10% decline in shipments planned for this year, it looks like Harley's finally making progress in aligning its production patterns with its sales trends.

So what's with the sell-off?
Regardless of this, investors sold off the stock by nearly 8% Friday. But from where I sit, Harley's ability to produce cash -- and even free cash flow -- in the middle of a recession gives us reason to hope for a rebound. Just as production cuts at automakers like Ford (NYSE: F ) , Toyota (NYSE: TM ) , and Honda (NYSE: HMC ) probably helped bring that industry back from the brink, so too can Harley set the stage for renewed growth ... by first shrinking.

Foolish takeaway
This train's been a long time coming, but better late than never. If Harley's finally getting serious about its inventory issues, now seems like a good time to climb aboard.

The Steve Jobs Betrayal
You may already know that in the final year of his life, Jobs revealed a stunning betrayal — and told his biographer, "I will spend my last dying breath... and every penny of Apple's $40 billion in the bank to right this wrong." What was it that made Jobs so irate — and why could it make a few in-the-know investors some major profits over the coming months and years?

Enter your email address below to find out what made Jobs so enraged!

Fool contributor Rich Smith does not own shares of any company named above. Ford Motor is a Motley Fool Stock Advisor pick. The Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (11)

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 icon found on every comment.

Report this Comment On January 25, 2010, at 4:05 PM, Turfscape wrote:

"it looks like Harley's finally making progress in aligning its production patterns with its sales trends"
Thank you, thank you, thank you. I've been watching HOG closely for a long time, and since the installation of CEO Keith Wandell, I've been bullish on the company. In addition to conceding that production was too high, HOG has restructured significantly, which will result in higher margins on vehicles through lowered production costs and lowered administrative costs (once the one-time hits from cuts and shutdowns pass). This is a company poised for long-term growth. Wandell has made excellent moves that make sense for continued profitability and smart expansion into new markets.
Report this Comment On January 25, 2010, at 8:43 PM, Everydayisgood wrote:

"Sales dropped 40% for the quarter ... last year's $0.40 Q4 profit turned into this year's $0.63 loss, closing out the year with a 90% decline in profits -- $0.30 per share ... in response to the tough sales environment, Harley expects to cut bike shipments by 5% to 10% in 2010."
Like the song lyric goes ... "I think it's going to be a long, long time, THIS time." Harley has severe roadburn after crashing and will take a very long time to repair and never be like new.
I'm a little stunned, Rich, that you would make something of the cash position without referencing the huge additional debt they have taken on which makes that cash possible...and then not speculate about a burn rate going forward given their bleak near and intermediate prospects and weak projections by management.
In an environment where unemployment is tragically high and job growth will not happen in the foreseeable future until small businesses are given tax credits for new positions, how can you seriously think Harley is fairly valued above 15%
One out of four homeowners are behind or underwater on their mortgages and sales of established homes dropped 16.7% this month, the biggest drop in 40 years. Why would you think people are going to go out and buy expensive hogs anytime soon.
The headline says Harley got creamed and it only dropped a couple of points. I think Goldman got it right and that Harley still has a long way to drop before it adjusts to fundamentals and the outlook for at least the next three years.
Report this Comment On January 25, 2010, at 8:45 PM, Everydayisgood wrote:

that should be $15 .... not 15%. sorry.
Report this Comment On January 26, 2010, at 2:28 PM, jaypearce wrote:

The earnings (or lack of) don't justify the current price. Very disturbing that shipments will even be lower in 2010 than 2009's horrendous numbers. There may be a consolidation among dealers as there are too many to support this level of sales. Plus younger consumers are not finding Harley's as the brand of choice. Most boomers already have theirs. Forecast - lots more pain.

Add your comment.

Compare Brokers

Fool Disclosure

DocumentId: 1092769, ~/Articles/ArticleHandler.aspx, 5/25/2012 11:33:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 hours ago Sponsored by:
	DOW	12,454.83	-74.92	-0.60%
	S&P 500	1,317.82	-2.86	-0.22%
	NASD	2,837.53	-1.85	-0.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes