Harley Davidson (HOG) gave more insight into the primary reason earnings are dropping in the earnings call.
Financial Services:
“Harley-Davidson Financial Services delivered first quarter operating income of $34.9 million a decrease of $24 million or 40.8% compared to last year’s first quarter. This decrease is primarily due in a reduction in income from securitization. As most of you are aware the first quarter was a challenging time in the securitization markets. In the first quarter of 2007 HDFS sold $540 million of retail motorcycle loans. As part of the transaction HDFS retained $54 million of the subordinated securities on its balance sheet and recognized a loss totaling $5.4 million. This compares to an $800 million securitization transaction with a gain of $13 million during last year’s first quarter. The loss in the first quarter of 2008 was driven by increased securitization funding costs due to capital market volatility and expectation of higher credit losses compared to historical trends.”
“HDFS originated $518 million in retail motorcycle loans in the first quarter of 2008 compared to $630 million in the first quarter of 2007.”
“In terms of credit performance the 30 plus day delinquency rate for managed retail motorcycle loans was 4.78% at the end of the first quarter of 2008 compared to 4.08% at the end of the first quarter of 2007. Consistent with seasonal trends over the past several years’ delinquencies declined from the fourth quarter of 2007 to the first quarter of 2008 and credit losses on managed retail motorcycle loans were 2.71% for the first quarter of 2008 compared to 2.28% for the same period last year.”
“During the quarter the percentage of subprime loans outstanding remain within our historical growth range of 25 to 30% of managed retail loan receivables.”
Pretty straight forward stuff. Delinquencies have risen but not by any means at an alarming rate. The real problem is the ability for HOG to sell the loans at a profit. This is not any different than any other firm trying to sell securitized loans.
The key is that they are not having any problems funding additional loans and are not being forced to hold more than they want…
This will just take some time.
Disclosure (“none” means no position):Long HOG
Visit the ValuePlays Bookstore for Great Investing Books
This work is licensed under a Creative Commons Attribution 2.5 License.