Harley Davidson (HOG) as economic barometer–positive signs

Harley Davidson (HOG) is an iconic American company. Harley Davidson motorcycles have typically been an aspirational purchase for men over 35 (maybe 50+ and having gray hair might be a more accurate characterization). They carry echoes of Easy Rider, The Grateful Dead, and the Sixties Generation, as well as a hint of the power/danger of the biker gangs whose staple ride they are.

HOG is a particularly interesting company operationally, in my opinion. It is trying, with some success, to broaden its image to appeal to younger riders, women and minority group members. The company is also rationalizing its manufacturing operations and gaining better control over the workings of HDFS, its credit arm. All these moving parts present opportunities for a careful researcher to find evidence of potential positive earnings surprise.

And, of course, Warren Buffett, himself an icon, has recently become a significant shareholder.

In this post, however, I’m more interested in HOG as an economic indicator than as a stock to buy. Motorcycles are perhaps the ultimate discretionary (read: frivolous or unnecessary) durable purchase. A Harley may cost $20,000 and, though it may be a joy to ride, it’s not particularly useful. Boats probably top the list for frivolity, but they don’t appeal to as wide a demographic as bikes. (I own a small runabout and a couple of Harley t-shirts, but no bike—so far.)

HOG reported its June quarter results yesterday morning. They contain two positive signs for the US economy.

The first positive is in domestic motorcycle sales. Although they remain at only about 60% of the pre-financial crisis level, they are up slightly year on year.


2008           -13.0%     +7.9%            -2.0%

2009          -25.8%      -3.4%            -12.8%

2010          -15.7%      11.2%            +1.3%

On the one hand, the growth in sales comes from purchases of used motorcycles. But they are sales nonetheless. And they are coming after HOG significantly tightened up the credit-granting standards of its finance subsidiary, HDFS, which makes bike purchase loans to about half of domestic Harley buyers.

Shipments of new bikes from HOG to its dealers are also up slightly in the first half.  Overall dealer inventories are down by over a third vs. this time last year, with only supplies of used bikes higher than normal.

All this is good news for HOG. For the economy, the interesting thing is that men are becoming comfortable enough about their personal financial circumstances to be starting to buy Harleys again (without fearing divorce or severe bodily harm from their wives).

The second piece of good news comes from HDFS. It concerns loss experience and loan delinquencies.

At 4.5% of outstanding loans, those with payments more than 30 days overdue is somewhat higher than Harley’s pre-recession experience (3.6% in 2Q06 and 4.4% in 2Q07), But its not that far above- and it’s lower than at this time last yea ror the year before.

Loss experience is better, as well.  The current annualized rate of 2.04% is better than in either of the past two years.  It’s also within striking distance of the 1.63% posted in the first half of 2007 and the 1.20% of the first six months of 2006.   This good performance is partly because 85% of HDFS’s loans are now prime (5%-10% higher than pre-2009), partly because used bike prices, which plunged during the worst of the financial crisis, have begun to rise again.  But it must also be in part due to the fact that money isn’t so tight as it was during the worst of the recession.

I’m of two minds about the stock.  I don’t regard the Warren Buffett endorsement as a plus.  Mr. Buffett, one of our profession’s true geniuses, saw much earlier than anyone else that brand names and established distribution networks–in other words, intangible assets–had an immense value that was neither listed on the corporate balance sheet nor a factor in the thinking of his contemporaries.  So you could in effect buy them for free.  –and that’s what Mr. Buffett did.

But the insight came almost a half-century ago.  Everybody knows it now, just as well as everyone knows about Benjamin Graham.  So the Buffett touch isn’t enough any more, in my opinion.

In the case of HOG, however, a genuine corporate turnaround appears to be underway.  More in a later post.

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