Who would have thought major banks and a motorcycle would have the same issue.
Harley Davidson released results today and while sales and profits fell, share repurchases caused EPS to rise.
Revenue for Q1 was $1.31 billion compared to $1.18 billion in the year-ago quarter, a 10.8 percent increase. Net income for the quarter was $187.6 million compared to $192.3 million, a decrease of 2.5 percent compared to the first quarter of 2007. First quarter diluted earnings per share (EPS) were $0.79, a 6.8 percent increase compared to last year’s $0.74. Last years results were impacted by a three week strike by about $.03 cents per share.
CEO Jim Zeimer said “For 2008, the Company now expects earnings per share to decrease between 15 and 20 percent compared to 2007 resulting in expected earnings per share of $3.00 to $3.18.” Zeimer said that he expect to ship about 8% fewer bikes than last year.
During the first quarter, worldwide retail sales of Harley-Davidson motorcycles decreased 5.6 percent compared to the prior year quarter. In the U.S., retail sales of Harley-Davidson motorcycles decreased 12.8 percent for the quarter while the heavyweight motorcycle industry in the U.S. decreased 14.0 percent.
Retail sales of Harley-Davidson motorcycles increased 16.8 percent in international markets during the first quarter of 2008 compared to the first quarter of 2007. First quarter retail sales increased 31.1 percent in Canada; the Europe Region was up 7.8 percent; the Asia Pacific Region was up 19.5 percent; and the Latin America Region was up 53.3 percent.
Cash and marketable securities totaled $333.2 million as of March 30, 2008 vs $310 million last year. HOG repurchased 2.6 million shares of its common stock at a cost of $100.1 million during the first quarter of 2008. On March 30, 2008, the Company had 236.5 million shares of common stock outstanding.
The sales decline in total bikes does diminish much of the “discretionary purchase” talk that has been bantered about. While for a segment of the population they are, in this environment, an 8% decrease from the second strongest year in the company’s history hardly qualifies the purchase as purely discretionary.
So then, if sales are not falling off a cliff and merchandise and parts sales (this means people are modifying existing bikes) are actually increasing, what is the issue?
Here is the issue. Harley-Davidson Financial Services (HDFS) reported first quarter operating income of $34.9 million, a decrease of $24.0 million or 40.8 percent compared to the year-ago quarter. The decrease is primarily due to a reduction in income from securitization. Has HDFS just met last years results, EPS for Q1 would have been $.89 a share. Of course we do not live in a world of “what if’s” but if we are trying to figure out where the issue is, we have to do the exercise.
Essentially HOG faces the same problems Citigroup (C), Merrill Lynch (MER), Wachovia (WB), Bank of America (BAC) and other financial services operators are, people will not buy (or are doing so a vastly lower profit margins) their securitized loans.
Of all the possible reason for an EPS reduction, this has to be the best. Sales are holding up despite predictions of a worse number and international operations are going full bore (the real impact here will not be fully felt until 2009). Simply put, the business of selling bikes is not being severely strained.
It is credit. Not losses on loans, but HOG’s ability to repackage them and sell them for a nice profit. It does also mean that should the credit environment right itself some this this summer, you may see a dramatic revision to the upside from here.
Either way, I’ll take my 3.5% yield and wait.
Disclosure (“none” means no position):Long HOG,C, WB, None
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5 replies on “Harley Davidson’s (HOG) Problem Same as Banks”
One point of concern with Harley’s credit situation is that they will no longer make loans in excess of the value of the bike – traditionally they would go up to 120-130%, with the extra basically allowing dealers to upsell the customer on fancy extras/customization.
I remember my uncle telling me that you use to be able to sell the bike for more than you bought it for. Meaning that if the bike cost me 20k to buy from Harley then I could use it for 3 years and sell it for 23K. For the longest time you would put in an order with a Harley dealer and it wouldn’t be filled for another 4 years. I know it sounds impossible and i was shocked when i heard it but he said it was common practice. thus a 120% loan wouldn’t be that unreasonable…hmmm where have i heard this before?
i am not sure that is the problem. they specifically said it was problem with securitizing these loans…
I like HOG – I used to work there, employees get a 20% discount and some drive their bike to work even in winter. Great company, everyone wears jeans and t-shirts to work.
I don’t see an issue with dropping the loan down to 100% either. Granted, the upsell is where the margin is. I agree with Todd on this one, the issue is in being able to resell the loans. However, as long as HOG can just sit on them, eventually the buyers will be there again and profit will jump.
I also don’t see much credit risk due to the amount of an average bike vs that of a car or home. In addition, the used bike market is still very strong which would allow someone in a tight spot to sell their bike off and pay back most if not all of the loan.
It’s only a good buy right now though, not a great one. It has a ways to fall yet as it’s quite a bit more elastic than you think Todd, and the economy is quite a bit weaker than you think (it’s not a 2 quarter recession). I’ll see you when it hits $30.
JD
The problem right now is securitizing and selling off these loans – but you need to put it into the proper context and look forward to see the consequences. 64% of Harley’s current assets and 40% of total assets are financing receivables. Dealers need to make their margin, and if it isn’t coming from upsells on the customization, they’ll need to raise prices on the bikes by a bit. That will slow demand somewhat, etc. etc.
You know I try to be positive, I like Harley, but I’m just seeing where I was wrong – answer being, too levered to creating demand with their own financing in a very bad time for anything dependent on financing.