Harley Davidson (NYSE: HOG) Stock Analysis

52 Week HOG Stock Performance vs. S&P 500

Harley’s (HOG) sales are finally picking up, with the company recently booking it’s first quarterly sales growth in over 4 years (ouch). But does this turnaround story have a happy ending?

After billionaire investor Warren Buffett made his $300 million loan to Harley Davidson (at a hefty 15 percent rate) in the middle of the financial crisis, he joked that Berkshire Hathaway (BRK.A, BRK.B) liked the kinds of companies “where your customers tattoo your brand on their chests.” How’s that for a visual example of brand power? As Buffett probably knew, a rabid fan base can buy a company precious time to recover from setbacks (see Apple circa 2002).

The Harley Davidson company (and the stock) has come a long way from those 2009 lows. HOG has finally reached the point where sales are growing and the balance sheet isn’t bleeding cash. But Harley hasn’t made a complete turnaround – yet.

Key Stats

Market Cap: $10.9B
Market Share: 54%
Sales Growth: +7.5%
Dividend Yield: 1.1% (raised by 25% in Q1 2011)

The Pitch

An iconic brand boasting improving fundamentals and notable sales growth, Harley seems like an attractive bet on a turnaround stock. But it’s definitely too early to say when HOG can get back to peak performance.

Bottom Line: Keep HOG in your watchlist, and look for a better entry point in the $35-40 range.

Recent Performance

Harley recently reported revenue up 15% to $1.5 billion, behind a 13% increase in shipments of motorcycles. Income was up 36.8%, leading to reported earnings $0.81 per share, up from the year-ago quarter, which was $0.59 per share. The company boosted guidance for the year and stated that dealer inventory levels were lower than they forecast, suggesting strong demand.

Investors responded to the good news by pushing the stock up to another 52-week high. (See conference call transcript).

Turning the Corner

Sales Growth

For the first time in 17 quarters, Harley reported selling more motorcycles than in the year-ago quarter. Growth in the U.S was the most impressive, while international growth contributed too. Thanks to relatively surging sales in the U.S., the mix of domestic to international sales has dropped from 42% last year to just 36% now.

Source: HOG Earnings Release

Improving deliquency rates

The next biggest contributor to Harley’s impressive profitability rebound has been at the company’s financial services division, called HDFS. Harley provides financing to many of it’s customers. That made  HDFS a net liability over the past two years or so as delinquencies and debt write-offs sprung leaks all through HOG’s balance sheet.

But lately, thanks in part to some better credit standards, those underperforming loans have largely disappeared from Harley’s books and HDFS contributed a solid $82 million to the income statement this quarter. Delinquency rates have now improved to their best position since well before the crisis.

Source: HOG Earnings Release

Balance Sheet

Harley’s cash position has improved, making it only a bit less likely that they’ll need another emergency cash infusion if sales crater again. The company has about $1 billion in cash available and has access to another $1 billion in credit. Capital investment, R&D, and an expensive restructuring process have been the main drivers keeping cash balances down. With the restructuring scheduled to conclude in the next year with another $80 million or so in charges, cash balance should start improving again in 2012.

Key Risks

While the turnaround has been impressive so far, there are plenty of obstacles Harley will have to navigate before declaring success. Main risks include:

• Production Inefficiencies – Will the new plant retooling deliver enough efficiencies to justify the investment and allow the company to line up production with demand and manage inventories better?
• Research & Development – Innovations have been slow to trickle into Harley’s models in the past and the company will need to step up R&D to hold on to or expand market share.
• Demographics – Harley has made some progress convincing younger riders to hop on but has plenty of work to do here.
• Recession Vulnerability –  The recreational vehicle industry is extremely vulnerable to recessions. While Harley has made progress shoring up costs and balance sheet problems, it needs another few quarters of growth before it is out of the woods completely.

What do you think? Are you ready to tattoo Harley’s stock on your portfolio? Leave a comment below.

Full Disclosure: Long HOG.

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