Harley-Davidson Burns Rubber, Not Cash

Riddle me this: What happens when you rev the motor, while pressing firmly on the brakes?

You don't have to be a card-carrying member of a motorcycle gang to know the answer. As soon as you let off those brakes, Fool, yer gonna burn rubber … and that's just what I expect to see at Harley-Davidson (NYSE: HOG  ) .

It's been a good 48 hours since Harley released its fiscal-first-quarter 2010 earnings. Plenty of time for the mainstream media and usual rogues' gallery of analysts to weigh in on the news. (Actually, Citigroup and Goldman Sachs were carping from the sidelines even before the news came out.) With Harley's shares revving 7% higher on the news, you can tell most people liked what they saw. By now, you also know why everyone thinks the shares reacted so well. According to The Wall Street Journal, it came down to two things:

  • Remove the numbers for Harley's Buell and MV Agusta divisions, both of which are going bye-bye, and focus only on the eponymous hogs, and Harley turned in a better-than-expected performance last quarter -- $0.29 per share in profit, versus $0.22 expected.
  • Harley's embattled finance unit, suffering from the same credit crisis that's plagued fellow industrial heavyweights dabbling in banking -- Textron (NYSE: TXT  ) , General Electric (NYSE: GE  ) , and Caterpillar (NYSE: CAT  ) -- turned its first profit in four quarters.

Great news? No doubt. But it's hardly "news" if everyone's talking about it. As an investor, you don't find your edge by looking where everyone else is already staring. So -- this being the Fool and all -- let me instead tell you what's really important about Harley-Davidson's report.

One word; starts with "I"
Yep. Just one word. You see, inventories are key to this business. The more bikes out there, the more it swamps the market with excess inventory, the worse Harley does. In contrast, when Harley takes a tighter rein on its business -- sort of like it's four-wheeled cousin Ford (NYSE: F  ) has done -- business can boom.

So it's gratifying to see Harley proving itself serious about fixing its inventory problem. With sales down 19% in Q1, Harley chopped 24% off its inventory number year over year. That helped the company generate $186 million in free cash flow in Q1, versus $247 million in cash burn this time last year. Best of all, Harley is promising to ship about 7% fewer bikes this year than last, keeping a tight hold on its product.

Foolish takeaway
So far, Harley's doing everything right to right its business. And the folks who were saying Harley should just throw in the towel and sell out to private equity? I don't expect we'll be hearing from them again anytime soon.

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


Read/Post Comments (6) | Recommend This Article (9)

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  • Report this Comment On April 22, 2010, at 11:10 PM, seanrick wrote:

    You writers have nothing better to write about

    except this manipulated stock just a matter of time

    before the retail customer gets screwed thanks to articles like this go wallstreet scum

  • Report this Comment On April 23, 2010, at 11:19 AM, taylorvongrela wrote:

    Did I honestly just read an article saying that Harley's inventory reduction is ultimately a positive? Did you even listen to their earnings call?

    Management was explicitly clear that even with the drastic 23k inventory reductions (Year over year) and lower shipments, dealers were still holding much higher amounts of non-current model year bikes. Harley still couldn't clear the amount of inventory necessary. And you're not even accounting for the rampant amount of used Harleys on the market now!

    I had some completely different take aways from the earnings report.

    1. HD's market share actually decreased by 2.3%, whereas previously it had been growing.

    2. Gross margins were down to 36.6% from 37.1% in the previous year, and even this is severely misleading! Management was very open in stating that a very favorable product mix (high purchases of touring vs. less sportsters) benefited margins by 500 basis points! A full 5%! Management knows that won't be the case going forward, and if you remove that 500 bps from this quarters performance, they miss analyst estimates (and if you include MV Agusta and Buell, they're not profitable in the quarter).

    3. Harley's customer base is aging pretty quickly. They need to capture younger riders with their sportsters, which is a main reason why they won't be able to maintain their historic margins going forward.

    And one last tidbit that snuck by you and your simpleton analysis: No mention whatsoever of Harley having to pull close to $2 Billion in receivables and debt back on their balance sheet? What was management's spin on this factoid? Well, they pointed to the fact that 30+ day delinquent loans declined to 4.57% from 4.89% Year over Year. That's easy to say when all the receivables they brought back on their balance sheet were from 2005-2007 and had already passed their peak loss curve.

    Next time you want cheer for a stock, I suggest you do you work before picking up your pom poms and putting your skirt on.

  • Report this Comment On April 23, 2010, at 2:01 PM, RegK wrote:

    The machinations of high finance aside, Harley's biggest problem might be that its product is in danger of becoming just another commodity, as opposed to a sacrosanct icon. As a commodity it will be judged on its relative merits; a vulnerable position, given the advancement of its competitors.

    The rise in Harley's stock is based upon the interpretation of numbers. While institutional investors may well understand these interpretations, they do not necessarily understand the brand itself. Proof of this can be found in the investment capital that was thrown (away) at would-be competitors in the '90s.

  • Report this Comment On April 23, 2010, at 4:52 PM, plange01 wrote:

    harley is well up on the list of companys most likely to go bankrupt....

  • Report this Comment On April 25, 2010, at 10:30 AM, daveandrae wrote:

    Incredible-

    No wonder a mere 3% of the population controls a whopping 77% of the wealth in this country. Everyone loves a sale, except when there's one on wall street. I wonder what people are going to say when the stock is trading in the 40's.

    I too, listened to the conference call. Of course it was positive. For the stock market, which is always looking six to nine months ahead, is telling you so.

    There is no such thing as a good market, or a bad market. There is only one, supreme, EFFICIENT market. And just as it correctly priced the grossly over levered Bear Stearns, Wamu, Fannie Mac, Fannie Mae and Lehman brothers all the way down to a buck a share, or less, it too is correctly pricing in a recovery at Harley Davidson. Just like it did in 1990-91, and just like it did in 2002-03.

    Do your homework people.

    Thomas Edmonds

  • Report this Comment On April 26, 2010, at 12:37 PM, Matt015 wrote:

    Daveandrae,

    If you believe in "one, supreme, EFFICIENT market" then you're dreaming. How do you explain bubbles? The fundamentals of the late 90's tech stocks told the market everything was overpriced, but shares went up anyway.

    The market isn't as efficient as most would like to believe.

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