good news from Harley Davidson

the results

Harley Davidson (HOG) reported 2Q11 earnings before the New York market opened on July 19th.  EPS came in at $.81, a gain of 37% year on year, on revenues that were up by 18%, at $1339.7 million.  The Wall Street analyst consensus for HOG was $.71.

In contrast to most of the companies I’ve been watching, whose stocks have either shown little positive reaction–or gone down–after big positive earnings surprises (look at WYNN or AAPL), HOG shot up about 9% on this news, capping a run that has seen the stock rise 50% since mid-June.

the turnaround

HOG is an intriguing turnaround story, with three elements to new management’s plans:

–recovery from very serious damage done by the recession

–broadening the customer base beyond American males who watched Easy Rider as a first-run film, secretly love the Grateful Dead and need the extra stretch HOG puts in its tee shirts to accommodate seriously expanded waistlines, and

–overhauling inefficient manufacturing and distribution.

I’m not sure that at today’s price you’ll make a lot of near-term money in the stock.  I don’t own HOG now, though I owned it for years in a small-cap portfolio I once ran (despite the fact that I consider a US company having a ticker symbol that spells a word to be a serious red flag).  I did think about buying the stock after good 1Q11 results, but decided I had enough risk in my personal portfolio without it.

Anyway, what interests me most about HOG’s 2Q earnings report is what it says about the current state of the US economy.

a little history

Like a motor boat, or a two-seater sports car, a motorcycle–especially an expensive one like a Harley–is not a very practical purchase.  The riding season is short in many parts of the country and rainy weather turns a ride into an unpleasant experience for most people.  Sales of any of these vehicles are highly sensitive to the state of the economy.

During the boom years in the middle of the last decade, lots of people were feeling wealthy enough to buy Harleys.  Many got financing from HOG.  As the recession developed, a large number of these new owners couldn’t afford their payments any more and turned the keys back over to Harley.  This had two bad consequences for HOG:  demand for new bikes dried up; and dealers’ lots were flooded with tons of repossessed next-to-new used motorcycles that needed heavy discounting to be resold.  That depressed prices across the board.

Pretty ugly.

the sound of a corner turning

What caught my eye about HOG’s 2Q11 earnings report is that, for the first time since late 2006, retail sales of new motorcycles are up year on year in the US–by 7.5%.  Dealer inventories are below normal.  The credit experience in HOG’s financing arm has been improving for four quarters–although this is probably mostly a function of better underwriting.  And the company has raised its projected shipment numbers for the second half.

This is certainly welcome news for HOG.  More important to me, the increase in demand for new motorcycles seems to show that consumers are more confident, and that therefore the US economy is on a sounder footing, than the consensus realizes.



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