Miles Of Open Road Ahead for Harley Davidson

by Investing Daily
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Few companies in the world can boast the customer loyalty of Harley-Davidson (NYSE: HOG).

Owners of the heavy-duty cruising motorcycles, with their head-to-toe leather, are easy to pick out in a crowd. Ask any of them what it’s like to own one, and they’ll tell you that having a Harley-Davidson in your garage is unlike owning any other type of motorcycle. It’s a culture in and of itself: In Ontario, Canada, where I live, motorcyclists, the vast majority of them Harley-Davidson riders, come from miles around to lay siege to the tiny town of Port Dover, on Lake Erie, every Friday the 13th—even when it falls in February. They come to ride, socialize—and most important of all, to talk about bikes.

To give you a sense of the gathering’s size, the 2011 Canadian census pegs Port Dover’s population at 6,387. On the last Friday the 13th, in July, that jumped by about 1,565%, when 100,000 bikers rumbled into town on their shiny steeds.

Next year, the company celebrates the 110th anniversary of the first Harley-Davidson motorcycle, which William S. Harley and Arthur Davidson built in a 10-by-15-foot workshop in Milwaukee, Wisconsin. A far cry from today’s heavy cruisers, the first Harley was literally a bicycle with a simple combustion engine attached. But that first bike established the company’s reputation for reliability: ten years later, it was still going, having clocked 100,000 miles with the engine running on its original bearings.

The company has events planned for riders in all corners of the globe as part of its year-long birthday party. The highlight? A “blessing of the bikes” by Pope Benedict XVI in St. Peter’s Square in Rome.

Recession Was a Rough Road for Harley-Davidson

The company felt the full force of the 2008/2009 financial crisis. Its shares slumped badly, from $42.80 on September 19, 2008, to a low of just $8.33 on March 6, 2009. That’s because buyers—even die-hard Harley-Davidson fans—had to put off their bike-buying plans while the economy was in free-fall and unemployment was spiking.

In response to its falling sales, Harley-Davidson embarked on a massive $500-million restructuring plan that involved cutting jobs and streamlining its manufacturing processes. The company is now in the last stages of that rebuild.

As a result, it now manufactures three classes of motorcycle—Touring, Softail and Tri-Glide—at one factory in York, Pennsylvania. As well, Harley-Davidson now has what it calls “surge capability” at the facility, which lets it more closely align manufacturing with seasonal demand. The company says the restructuring saved it $217 million through 2011, and will cut its costs by $315 million to $335 million a year on an ongoing basis.

In 2011, motorcycle sales accounted for 76.2% of Harley-Davidson’s revenue, followed by parts and accessories (17.5%) and general merchandise (5.9%). Its top five markets are the U.S., with 67.7% of sales, Europe (16.8%), Japan (4.9%), Canada (3.3%) and Australia (3.0%).

Harley-Davidson Shares Have Been on a Roll

Investors, for their part, have mostly been riding along with the company throughout its restructuring. The shares have now moved back above their September 2008 level, and now trade at around $44.72.

A string of positive earnings reports, reflecting both the restructuring and recovering motorcycle sales, have certainly helped. In the second quarter, Harley’s sales rose 14.6% from a year earlier, to $1.73 billion. Income from continuing operations came in at $247.3 million, or $1.07 a share, up sharply from $190.6 million, or $0.81. These results also beat the Street’s expectations of $1.05 a share in profits on revenue of $1.63 billion.

Overall unit sales rose 2.8%, to 85,714 bikes. The company’s Europe, Middle East and Africa region saw its unit sales decline 6.4%, but dealers sold 4.0% more bikes in the U.S. Unit sales also rose 10.0% in the Asia-Pacific region and 37.9% in Latin America.

The company continues to forecast that it will ship 51,000 to 56,000 motorcycles in the third quarter of 2012, a decline of 9.3% to 17.4% from a year ago, as it continues to restructure its York production facility. However, it did say it still expects to ship 245,000 to 250,000 bikes on the year, up 5% to 7% from 2011.

Harley-Davidson: A Great Way to Profit From an Economic Rebound

Despite its strong potential, there are still risks involved with investing in Harley-Davidson, including its significant exposure to Europe. As well, given the discretionary nature of motorcycle purchases, the stock is highly vulnerable to swings in the overall economy. That’s why its beta rating is 2.15 (which means it’s more than twice as volatile as the overall market).

Still, that vulnerability can also be a big plus. As the global economy recovers and its customers’ prospects brighten, the company should profit as pent-up motorcycle demand is released, and riders stream back into its showrooms. Its restructuring, which gives it better control of its production volumes, brightens its outlook even further.

The company is also working hard at expanding its appeal beyond its core market of middle-aged males. For example, as part of Black History Month this year, it ran an exhibition on the evolution of black bikers, including tributes to William B. Johnson, the first African-American Harley dealer, and Bessie Stringfield, the first black woman to ride across the country.

Notably, the next Friday the 13th doesn’t fall until September 2013, giving the citizens of Port Dover a full year to get ready—or make plans to get out of town. Undoubtedly, more of their guests will be sporting new Harleys when they arrive. Check out our free report to find out if Harley-Davidson made our list of top growth stocks.

This article was originally posted on Investing Daily.

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