FOOL ON THE HILL
Harley-Davidson has been, and continues to be, one of the best-performing stocks and companies around. The past may point to future success for the company and its shareholders, but that doesn't mean that arguments by short-sellers and other bears should be dismissed out of hand. They need to be listened to, evaluated, and measured.
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I guess you could say I'm "psychically long" Harley-Davidson Inc. (NYSE: HDI). Although I've never owned shares of the company, I've been awed by all the company's reported financials ever since I was enlisted to write the bull side of a Dueling Fools piece on Harley back in 1998. In the spring of 1999, I wrote up a brief little analysis of the company for a "Stocks for Dad" special, and though by all accounts my father ignored my advice to buy, he would have done very well to heed me. So it's with that love-from-afar perspective that I've read a column or two over the last 18 months or so from RealMoney.com's Herb Greenberg that discuss reasons some short-sellers think the stock is set for a fall, and that refer frequently to Harley as a "cult stock" owned by people who "need a deprogramming." Granted, as a fellow (sometime) writer of online stock analysis, I'm quite familiar with the fact that a multitude of hostile emails greets the author of any piece criticizing a publicly owned company. Even pieces that are complimentary -- but not complimentary enough -- are likely to generate a few missives that are, ahem, less than complimentary of the author's investing acumen. But investors keeping a closed mind to the bear's side of the equation are doing themselves no service. I am certainly aware of one particular Greenberg column regarding a stock I owned once upon a time -- and felt I knew intimately. Had I heeded the warning signs offered up by Greenberg, I could have saved myself a considerable amount of financial pain. But we're talking about Harley Davidson -- one of the best-run companies on this or any other planet, and one of the very top performers for its shareholders over the last decade-plus. You can look it up. When you're going to take a shot at the King, you'd better kill him -- and if the latest shot is the best the short-sellers can muster, I wouldn't feel any particular need to take out extra life insurance on the motor royalty. Greenberg wrote in June of last year that Harley was attractive to short-sellers because of prognosticated slowing sales based in part on the expectations of higher interest rates. The hoped-for slowing sales didn't materialize by December, but shareholders were still under the sway of a cult, and the shorts were still short, predicting a stock price of $25 per share based on projected softening demand. When demand failed to appropriately soften over the next couple of quarters -- actually showing a 19% year-over-year growth in the latest quarter -- the original reason for getting on the short side of this stock mutated, and as of the latest writing now addresses some of Harley's financing operations. That, certainly, makes for a more interesting story and better educational exercise than merely looking for (and not finding) slowing sales. The latest danger sign, according to short-sellers, is that Harley operates a tenuous financing operation that deteriorates the quality of its earnings, and is misleading the market about the ability of Harley to sell its bikes in this weakening economy. Harley is offering "ultralow" 4.9% financing, the argument goes, and "gives customers an extraordinarily long 72 months to pay off their loans." The reason Harley is so casual with its financing, apparently, is to artificially boost earnings, as Harley then securitizes the loans and books a noncash gain -- the size of which is "undisclosed," and which is "an arbitrary figure that can change at management's whim" -- on the sale. Greenberg compares the use of securitization to "creating a cookie jar that a company can dip into to manage earnings. Or so it seems." Harley, the claim goes, is unable to sustain sufficient earnings growth through motorcycle sales, may "really be a subprime lender in disguise," and is pulling its estimate-beating earnings from that particular hat. I suppose Harley might be a subprime lender in disguise. If so, however, it's a really, really good disguise from what I can tell. After all, doesn't the subprime lender model involve making loans at above market rates to less creditworthy parties? Offering below market-rates, it would seem, would be heading in the wrong direction. And just how is it that offering 4.9% interest rates is a sign of desperation? After about five seconds on Bankrate.com, I was able to find plenty of auto lenders employing 5.9% interest rates. And if you've watched as many hours of sports lately (go Yankees!) as I have, you've probably noticed that seemingly all car companies are offering 0.0% financing. (Though I would agree that 0% financing certainly does seem to be a sign of desperation.) Further, 72-month terms are not "extraordinary long." Rather, they are the term that is available "in general," according to the very first website I found that discussed the matter. What's more, though I only spent a couple of hours looking through Harley's last 10-K I'm hard-pressed to agree that the company's decision about how much of its financing division's loans are securitized is arrived at "by whim." Harley appears to securitize nearly all of its loans: As of Dec. 31, Harley had securitized $1.1 billion of its $1.2 billion in managed motorcycle retail installment loans. Is Harley any good at running its financing? Well, you can determine that for yourself, but according to the 10-K only $19.4 million of the approximately $1.2 billion loan total being serviced is 60 days or more past due. That's about 1.5% or less than the 1.89% Harley uses as the expected credit loss rate when it securitizes its loans. Neither is Harley a fly-by-night operator in the financing business. The operation has shown steady growth and profits since 1995. If the operating profits from its financing business are just exactly the amount by which Harley is beating estimates -- three cents a share in each of the last two quarters -- each quarter, why are those making the estimates not incorporating Harley's financing operations in their quarterly estimates? I find that difficult to understand -- or buy into. There's a chicken-and-egg problem with the whole wonderful stock/cult shareholders equation. Which came first: strong company performance, or stockholder enthusiasm? In Harley's case, I would argue it's the former. There most certainly are stocks that have investors whose enthusiasm derives entirely from the fact that the stock has done well for them over some period of time, and those investors would do well to check in for a little "deprogramming" once in a while. But there are also companies that have earned a higher degree of trust from their long-term and well-rewarded shareholders. Though Harley hasn't earned a free pass about questions concerning each line item of the balance sheet and income statement, and, more broadly, how the company is performing, the burden of proof in this case falls on those describing it as unable to live up to the high expectations embedded in the stock price. They may have a case, but the one I've seen so far doesn't sway this juror. Bill Barker spends his days looking for his next job. Let him know if you've got one in mind. He does not own shares of Harley. You can see what he does own online thanks to The Motley Fool's progressive disclosure policy.
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