Hot for Harley-Davidson

There it sat. Strolling out of a restaurant in sunny Florida while on vacation a few weeks back, my eyes fell upon a gleaming black and silver Harley-Davidson (NYSE: HDI  ) Fat Boy sitting in the parking lot. The bike was one of the company's 2003 100th anniversary editions, and it was breathtaking.

I circled it, walking with my hands clasped behind my back, mouth agape, peering at every detail, taking in the sinuous lines, the classic styling, the disc wheels, the spotless chrome. It was gorgeous. It was sexy. It was hot.

Harley, you had me at hello.

Celebrating America's motorcycle company
In honor of Harley's 100th anniversary (and because I've always had a thing for motorcycles), I decided to take the company for a test drive. Kick the financial tires, if you will. See how this century-old baby's wearing its age, and what the next 100 Harley years might look like.

What I found is a dew-faced, innovative, forward-looking business. This is hardly a wrinkled old stalwart, tottering around delicately and dogmatically trapped in the past.

If I do say so myself, Harley, you're looking good for your age. Heck, you're looking good for any age.

Let me confess before motoring ahead that I love Harleys. I love the bikes, and, yes, I love the inherent attitude. Motorcycles are dangerous, they're extravagant, and they're rebellious. There's just something about the image of cruising down the highway on a Harley -- scenery whipping past, open road ahead -- that gets me every time.

I can't walk past one without gawking. I love hearing that rumbling and aggressive engine rev to the point that normal people cover their ears. I like 'em loud and I like 'em fast. And nothing says loud and fast like a Harley.

The company is unquestionably one of America's premier iconic brands. When you think "American classic," Harley is right up there with Coca-Cola (NYSE: KO  ) and Levi's.

You can keep your Ducatis, your BMW bikes, your Triumphs, your Hondas and Yamahas, and even your Indians. Give me the blueprint for what a great bike is. Give me a Harley.

I'm not the only one that feels this way. Lots of investors love Harley, too. The company has been a huge stock market success since going public in 1986. $100 invested in Harley at its IPO would have grown to $16,630 including dividends at 2001's year-end. That same $100 invested in the S&P 500 over the same time frame would have grown to just $480.

The numbers
Harley's financials are as steely and impressive as its bikes. Its sales growth, margins, and earnings growth all shine. Check out the past several years' results below.

  Sales Growth (year over year)2002    20.1%2001    15.7%2000    18.6%1999    18.9%1998    18.4%
  Earnings growth (year over year)

  2002    32.5%2001    25.9%2000    30.1%1999    25.1%1998    22.7%
  
    
  

  
    
      
        
          Net margins
        
      
    
  

  
    
      
        
          2002    14.18%2001    12.85%2000    11.81%1999    10.76%1998    10.23%
        
      
    
  

All of Harley's numbers are swoon-worthy, but the earnings growth and net margin expansion are particularly pretty. The company also has little long-term debt, excluding its financial services division. (Harley-Davidson Financial Services provides wholesale financing for dealers as well as financing for retail buyers.) And it's been buying back its stock over the past few years.

Last year was a great one for Harley as it revved up for its big 2003 anniversary. It began producing lots of merchandise (leather jackets, shirts, etc.) and special edition 2003 model-year bikes just for the celebratory year. The 2003 centennial bikes cost more and are higher margin than its usual line-up. Harley even extended the model year by two months to meet huge anticipated demand for the super-special hogs.

So when it reported in its first 2003 quarter that retail sales of Harley-Davidson bikes in the U.S. were down 3.5%, the market was spooked. An exceptionally snowy and messy winter kept much of the motorcycle-buying public indoors and out of showrooms during January to March. Shocking, I know.

Despite this logical explanation, some began screaming that Harley's legendary gap between supply and demand was shrinking. You'd have thought the company's history of excellence had suddenly and unexpectedly screeched to a stop, smack dab in its 100th year. Shares tanked to a new 52-week low of $35.01.

All this even though total revenues rose 20%, net income shot up 55%, and free cash flow more than doubled.

Q2 strikes back
Not one to stay beaten down, Harley hit hard when it came back with its second-quarter earnings. Sales jumped 22% to $1.22 billion. Earnings grew 40% to $202 million. Gross margins expanded to 36.4% from 33.5%. Net margins increased to 16.6% compared to 14.4%.

Better yet, U.S. retail sales grew 14%. Worldwide shipments grew 16%, and total revenues from Harley-Davidson bikes were $955.4 million, a bump of 25.7%. Because of the Q2 strength, Harley raised its production target for 2003 to 290,600 Harley-Davidson bikes, 10.2% greater than 2002.

This is not a company suffering from stagnation, with demand drying up for its motorcycles. Not even close.

I don't think the trend is going to reverse itself anytime soon, either. Harley has lots of factors working in its favor that almost guarantee strong future results.

What Harley's got going for it
First, the demographics of the average Harley customer are encouraging. He's a married man in his mid-forties (two-thirds of Harley purchasers are between 35 and 54) with household income of around $78,600. He's buying for recreation, not for transportation.

As more and more baby boomers retire, I betcha a chunk of them who don't already own a Harley will want Road Kings and Fat Boys to tool around on in their ample free time.

Harley's not ignoring the younger set, either. Its Buell division sells to younger customers, as does its Sportster line. The company has found that 90% of its purchasers intend to trade up to bigger and better Harleys sometime down the road. The Sportster is a good introduction for many, and Harley is keeping it fresh by redesigning the line for model year 2004.

Harley dominates the domestic heavyweight (651+ cc engine displacement) market with 48.2% share, up from 45.7% the year before. Internationally, though, Harley is still making inroads. In Europe, it has about 7.2% of the heavyweight market and it represents about 22.5% in Japan/Australia.

Harley's sleek, new liquid-cooled V-Rod may help it catch some of those young European buyers who would otherwise choose a Ducati or another brand. It should also attract younger buyers stateside. The V-Rod demonstrates Harley's desire to always keep innovating and improving its offerings, while keeping its brand and legacy firmly intact.

But mostly what will keep Harley moving ahead is what has always kept Harley ahead: its motorcycles, brand, and lifestyle. When people buy a Harley, they aren't just purchasing a bike. They're buying into a family of riders and into a history. Just the very words "Harley-Davidson" evoke loyalties and feelings absent among most companies. Harley has brand love and cult status in abundance.

This is a company other companies should hope to be at any age, much less when they're 100. Harley-Davidson the business is as exciting and strong as its bikes. Congratulations to an American icon for an amazing 100 years. Good luck on your next 100!

LouAnn Lofton doesn't own shares of Harley. Sadly, she doesn't have a Harley motorcycle, either, despite her intense longing for a shiny, new Fat Boy. The Motley Fool is investors writing for investors.


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