Investors and the Art of Motorcycle Business

Some of you may already know that Rule Breaking investors hunt for unconventional companies that deliver high levels of growth. So you'll often hear of companies that are probably not familiar to the everyday investor -- like, say, Protein Design Labs (NASDAQ:PDLI).

Our Motley Fool Rule Breakers service features something called the Rule Breaker Universe, a watch list with more than 255 companies with great growth prospects. If you're interested in the definition of a Rule Breaker -- or if you'd like some examples of companies that are being closely watched for their high-growth potential -- take a free trial and check out the ever-growing Universe (and the list of formal picks).

I like to check out the lineup in the Universe every once in a while -- there are always fascinating names in that dynamic list. The other day, I ran across one particular name, and the lightbulb went off in my head -- of course! I realized that even if you've been around for more than a century, you can keep on being a Rule Breaker, so long as you have the right spirit.

Ticket to ride
The gas-engine motorcycle was invented in Germany in 1885 by Gottlieb Daimler. Fast-forward to 1903, here in America. William S. Harley and Arthur Davidson -- just 21 and 20 years old, respectively -- broke all the rules in a wooden shed with "Harley-Davidson Motor Company" scribbled across the door. They were hooking up a motor to a bicycle -- and writing a page in U.S. history. The first Harley-Davidson (NYSE:HDI) dealer was formed in Chicago, when C.H. Lang sold one of the first Harley-Davidson motorcycles ever made. In 1909, Harley-Davidson introduced the first V-Twin engine, which produced that deafening growl that many of us associate with motorcycles.

The famous -- or, at times, infamous -- Bar & Shield Harley-Davidson logo showed up for the first time in 1910, and it was definitely not hand-drawn this time around. It was patented a year later, and thus one of the most lasting brands in U.S. history was born. In the beginning years, almost half of the motorcycles cranked out by Harley-Davidson were sold to the military, which shows what a technological innovation they were at the time.

That venerable history, of course, brings us to the ensuing years, when Harley picked up its rebellious attributes. For many people, Harleys bring to mind rebels, bad boys, and free spirits, not to mention Hell's Angels. The Harley-Davidson brand occupies a special niche among motorcycle aficionados, and it always promised its loyal fan base a way to express their love for certain elements of the American dream -- individuality, freedom, and the passion for the open road.

Hog wild for Harley
Harley may have burned a path of rubber from a certain bad-boy appeal, but that doesn't mean it's disappointed investors. The company has been publicly traded on the New York Stock Exchange since 1987. It's been highly profitable during that time, and it boasts 19 years of record earnings and revenues.

Regardless, though, investors haven't felt much love for Harley-Davidson shares lately -- there's been some reason to worry that macroeconomic concerns could take the air out of its tires.

Over the past five years, though, its compound annual growth rates for revenue and earnings are greater than 15% and 27%, respectively. Harley-Davidson has also been growing its margins consistently over that time period, with its trailing-12-month gross margin at 39.3% as of September 2005. It also boasts a return on assets of 19% and a return on equity of 32%. It's instructive to look at how Harley compares with auto-industry traditionalists Ford (NYSE:F), General Motors (NYSE:GM), and DaimlerChrysler (NYSE:DCX) for the past 12 months (as of September 2005):

When it comes to American wheels, Harley has an incredible niche, one that has shown itself in its steady profitability and sales increases. When you consider the way most American automakers have struggled recently, Harley-Davidson bucks many trends.

Road rage or easy riders?
Of course, at the moment, worries are sticking to investors like flies on the visor of a biker's helmet. Management has called for single-digit increases in sales this year, and, as I mentioned earlier, a quick glance at the past five years confirms Harley's slowing sales. Combine that with shaky consumer sentiment and the idea that "fun money" might dry up and, well, there are questions. Will the high price tag hurt sales? Can the company stay true to its die-hard loyalists and still increase its appeal?

However, I'd be remiss not to mention that there have been dips in demand in the past. Every time people wondered if Harley had finally rolled over the hill, demand picked up and the brand persevered.

Could Harley break the rules again? I certainly wouldn't bet against it -- breaking the rules has been its middle name over the course of its history. (Harley "Breaking the Rules" Davidson, anyone?)

You don't need a tattoo, a leather jacket and biker boots, or a hog to be a Rule Breaker investor. If you'd like to check out the more than 25 Rule Breaking companies we've spotted thus far, you can try outRule Breakers for one month -- at no cost. Peruse the full Rule Breaker Universe, post questions on our vibrant discussion board community, and freshen up on ultimate growth investing. As Harley illustrates, many Rule Breaking investments are built for speed.

Alyce Lomax does not own shares of any of the companies mentioned. Protein Design Labs is a Rule Breakers recommendation. The Fool has adisclosure policy.