If I had to choose one word to describe Harley-Davidson's (NYSE: HDI) business performance over the past decade, the word that immediately comes to mind is "cruising." In fact, the motorcycle giant has been trekking along on cruise control for so long, its incredible results are not only unsurprising, they're generally barely noticed as outstanding. Another quarter rolls by, another batch of record numbers are logged. Fourteen consecutive years of record sales and earnings. Ho-hum.
While the company's year-after-year results may be lost in the muffle of predictability, shareholder's have not missed experiencing the classic "vroom" of the V-Twin engine. Whether it's the product, the business, or return on investment, Harley-Davidson is all about performance. This is simply a finely tuned, lean, mean financial machine.
A few short weeks back, the company announced yet another record quarter. Sales reached $755 million, an increase of 24% over the year-ago period. Earnings grew to $90.6 million, 32% above last year and 7.4% above analysts' estimates, despite a pretax hit of $3 million due to a Buell bike recall. Shipments of Harley-Davidson motorcycles were up 19% and Buell model shipments rose 117%.
These results are not at all unusual. Earnings have grown by at least 20% in each of the past 10 years except for one, in 1995, when they rose 19.35%. Margins are in equally fine shape, with gross margins down slightly to 34% due to weakening European currencies and a higher mix of lower-margin products such as the Buell cycle line and general merchandise. Although dipping a bit this quarter, the trend over recent history is in the proper lane, marked by an improvement over the past eight years from the high 20s to the now very respectable mid-30s in gross margin percentage. Net margins are in Fat Boy territory, weighing in at 11.4%.
Checking in on cash flow efficiency, we see the one relative weakness in the nearly flawless business model. Let's calculate the Flow Ratio (you can find these numbers here):
(Current Assets - Cash & Eqiv.*) Flowie = ------------------------------------- (Current Liabilities - ST Debt**) * Cash equivalents = marketable securities and short-term investments ** Short-term debt = notes payable and the portion of long-term debt that is current 1,073,818 - 297,917 Flowie = ---------------------------- 470,229 - 48,163 Flowie = 1.84
Not a completely outrageous number, but certainly above an ideal range. A higher number means cash is being tied up instead of flowing freely and fueling the business. Harley-Davidson operates a business that very much revolves around inventory and finance receivables, and will likely never have a perfect Flow Ratio. I should note, however, that the number is down from this time last year, when it was clocked at 2.06.
The second quarter also marked the repurchase of 1.5 million shares of common stock, which brings the year-to-date total to just short of 1.8 million. This is another outstanding trend. Although employee stock options are being granted, the number of shares (split-adjusted) has remained roughly the same over the past decade due to consistent repurchase. The extraordinary growth of the company has been fueled by cash from operations and not at the expense of shareholders via secondary offerings.
No doubt about it, Harley-Davidson is riding high in the fast lane, each mile marker representing another rock-solid, double-digit quarter of growth and consistency. Though its loud pipes resonate in the open highway air, only a modicum of uproar follows on Wall Street. Quietly phenomenal, the Hog is cruising.
Next week we'll consider any wrenches that may land in the spokes and look at the future of the heavy motorcycle market. Drip on, Fools!
-- Vince Hanks, TMF Elwood on the Fool discussion boards