“Coming off a negative U.S. retail sales trend in the
first six months of the year, we ran an effective promotion in July that
increased retail sales and reduced inventories of 2007 model motorcycles.
However, our U.S. dealers’ retail sales have fallen sharply during August.” With that, shares of Harley Davidson (HOG) drop 10% today to below $50 a shares, 23% down this year and 28% below their high last year.
HOG now expects a modest decline in revenue for 2007. Diluted earnings per share (EPS) for the full year 2007 are expected to be down 4 to 6 percent, in the range of $3.69 – $3.77, compared to 2006 EPS of $3.93.
Looking ahead to 2008, they anticipate the U.S. retail motorcycle environment will continue to be challenging. It expects moderate revenue growth, lower operating margins and EPS growth of between 4 and 7 percent. They had previously provided guidance for 2009 as well, but will not be providing that guidance at this time.
I mid August in a post I related a conversation I had with a salesperson at a mega dealership Laconia , NH that essentially foreshadowed the above statement. I finished the post by saying “Earlier this year when shares were at $70 I recommended waiting until they reached the mid $50’s to buy. Based on my weekend visit, they may go lower still. This is a great company that makes a one of a kind product, but, people are not buying it now and that will hurt. I think we may see share prices in the $40’s before the year is out.”
We are at the $49 level today (Friday) and I honestly see no reason to jump at shares now. Much like Starbucks (SBUX), I would like to think HOG management was aware of this trend a while ago and hoped it would not come to fruition, all evidence to the contrary. That being said, there very well may be another shoe to drop in the future.
So, what should we do? Just sit back and wait. If you can get shares of this company in the low 40’s, you have a real steal. Be patient and it just may get there. I will go on record and say that anything around $45 or lower will be an no brainer buy.
3 replies on “Harley Davidson: "Below MSRP" Was A Bad Harbinger”
good post, i peg fair value at 40-45 based on discounted fcf.
siam,
i never thought it would get this low, at $45 i might not be able to resist
Siam, what kind of assumptions are you using to get a 40-45 target?
If you assume FCF of $1B for 2006, -5% growth for ’07, only 5% growth for the next 10 years, a sale at 10x year 10 FCF, and a discount rate of 10%, you still come up with a value greater than the current market value. Plug in a 10% growth rate for years 2-10 and the current MV is 70% of the calculated value.
I don’t own HOG, but it looks awful tempting right now.