Who Hearts Harley?

In recent months, we've seen first Citigroup (NYSE: C  ) call the bottom on Harley-Davidson (NYSE: HOG  ) shares, then Goldman Sachs (NYSE: GS  ) argue the opposite. As for me, I staked out a position somewhere in between these two clashing titans of Wall Street.

Conceding that the fourth-quarter sales report was worse than expected, and that Citi was wrong about Harley turning the corner, I argued that Harley's significant efforts to slash inventories, cut shipments, and max out free cash flow demonstrated that it's at least "leaning into the curve." Crunching the numbers, I concluded: "This train's been a long time coming, but ... If Harley's finally getting serious about its inventory issues, now seems like a good time to climb aboard."

And all of a sudden, it seems a lot of people agree with me.

Who hearts Harley?
Harley shares spiked on Tuesday in response to unconfirmed reports that somebody wants to buy the company. And not just a few shares. The whole company. Reuters was reporting that rumors were swirling concerning a possible buyout, with private equity player Kohlberg Kravis Roberts named as Prime Suspect.

Not everyone bought the story, of course. In fact, Barron's dashed cold water on these hopes, quoting a pair of analysts who echoed my own observations about Harley's progress. Noting that Harley has already satisfied the usual reasons for a private equity takeover (bringing in motivated management to cut costs and streamline operations), the experts argue there's little logic in Harley now handing over its accomplishments to an opportunistic acquirer on the cheap. Not with the stock selling for just 15.5 times forward earnings. Not when anyone with more than a hamster's memory span can remember that before the recession struck, Harley shares regularly fetched multiples of 20 times and up.

Speculating 'bout speculation
So what sparked the rumors? According to Barron's, it's possible that Harley has been reaching out to would be acquirers of its troubled finance unit, HDFS, for example. Whether that's true, I haven't a clue -- but I sure hope it is, because ...

Foolish takeaway
Big manufacturing companies like Caterpillar (NYSE: CAT  ) and Boeing (NYSE: BA  ) have demonstrated how useful having a captive finance arm can be to boosting product sales in tough economic times. On the flip side, though, we've seen at General Electric (NYSE: GE  ) and Textron (NYSE: TXT  ) -- and at Harley -- how one mismanaged finance arm can ruin a great manufacturing business.

As an investor, I'd love to see Harley get quit of HDFS -- and give itself a chance to show the world how profitable it can be all on its own. My bet: It would make for quite the thrill-ride.

Fool contributor Rich Smith has no interests, short or long, in any company named above. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 18, 2010, at 11:00 PM, Everydayisgood wrote:

    This is a cute article.

    "...anyone with more than a hamster's memory span can remember that before the recession struck, Harley shares regularly fetched multiples of 20 times and up."

    Then again, only those with a hamster's brain thinks Harley or its prospects going forward are anything close to how they were before... (and it was probably a hamster who has over-projected their earnings for 2010 and 2011 and thinks they can be anything but a shadow of their former self).

  • Report this Comment On March 18, 2010, at 11:24 PM, Everydayisgood wrote:

    This is cute but not compelling:

    "... anyone with more than a hamster's memory span can remember that before the recession struck, Harley shares regularly fetched multiples of 20 times and up."

    But only those with a hamster's brain think Harley or its prospects are anything like they used to be (and it was probably a hamster who made the bogus projections for Harley earnings in 2010 and 2011).

  • Report this Comment On March 19, 2010, at 2:22 PM, Capo1213 wrote:

    Harley's primary customer is an aging, tapped out lifestyle hog. There are virtually no aspirational Harley owners under the age of fifty. They bought Buell, shut it down. They bought MV Agusta, selling it a year later. They have zero sense of the current or next generations of motorcyclists. Their problems are as much product as they are finance.

  • Report this Comment On March 21, 2010, at 6:21 PM, PSU69 wrote:

    HOG, an emotional brand inked into the skin of the brand advocates, wrapped in the American flag. My pal is in a high level engineering position there. He knows I have ridden BMW bikes the last 20 years. I call him when I am shopping and he tells me to buy BMW again. He knows I ride long distance and fast. He said, "HD is still not ready for you." The HOG stock will drop when the next quarterly report is out. They are sellling less than last year. Too many HOG loans are upside down. Resale price erosion is rampant.

  • Report this Comment On March 28, 2010, at 10:55 PM, daveandrae wrote:

    Hello-

    I am a Harley Davidson shareholder. I am also a local and national H.O.G. member. I also own two Harley Davidson motorcycles, and have successfully completed the Harley Davidson police motor school on my very own motorcycle.

    And no, I am not a cop. Far from it. Yet, my motor skills are strong enough that I practice regularly with professional motor officers. I know several, and correspond with my instructor, who is certified to motor train these type of people, almost daily.

    Last year alone, I traveled, exclusively on my bike, to Daytona FL, all over Colorado, Sturgis, SD, Devil's Tower, Wyoming, the Indianapolis motoGP, and Nashville, TN.

    Thus, obviously, I know a lot about the motor company, its latest products, and how these products have fared in the REAL WORLD, against professional competition.

    So I can tell anyone that is interested in this stock that the first four posts are so far away from the truth, that I found reading them rather disturbing. For the comments say more about the ignorance of the individual Investors, then of the risk of Harley Davidson stock as a long term "investment."

    This is yet another reason why a mere 3% of the population controls a whopping 77% of the wealth in this country. Most people put way too much money in things that they don't understand, and far too little in stocks in which they know a great deal.

    Thomas Edmonds.

  • Report this Comment On March 29, 2010, at 12:31 PM, DWPINC wrote:

    Thomas, I am a shareholder and Harley owner too (including National H.O.G.). I don't have the mileage on my bike that you do (yet) but there is nothing like a Harley and the brand has the most loyal following around. I find the people who bash the company are little brained embiciles, and not worth the time to read their stupid comments. HOG is a great company and they make great bikes. The economy is in the crapper but it won't stay that way for long. I could care less about the coming quarterly results. We are long term minded and we will support the brand for years to come. I love your comment so safe riding my friend and happy investing.

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