Seeing the Blankfein piece in the FT against Mark-to-Market vs. Wesbury is the dichotomy of the market place. Those who believe in Efficient Market Hypothesis believe that price trend represent all the information available for a particular security. Mark-to-Market is valid in all environments for traders, technical and momentum investors. Efficient Market players have investment horizons from minutes to months. If they hold longer than a year, it is only due to a series of short term technical signals that reinforced holding.
The “Value Investors” on the other hand look for mispricing vs. fundamentals, i.e. discount to Book Value, Cash Flow or some other value parameter that is measurable and quantifiable. Warren Buffett is the prime example of Value Investing, the best known, but there are numerous others. However, the number of true “Value Investors” is far less than all other investors. Value investors investigate, analyze and parse a target company’s business till they are comfortable with the decision to commit funds at a level at which they feel an anticipated rate of return is likely to be had over a multi year period. It is not unknown for Value investors to hire investigators and analysts to look at each business site of a company’s operation, individual tax filings, competitors and vendor information in an effort to sleuth the locations of all values within a company. Value investors have an investment horizon that is typically greater than 5yrs.
Mark-to-Market accounting during down markets provides opportunities for Value investors. Their records are well known. There are no traders famous for their investment judgment over the same period of any well known value player.
Importantly, mixing Value investors and Efficient Market players (calling them investors is an abomination of the word) in the same room is like watching two vastly different cultures trying to communicate. They can’t. They are so culturally different that the terms, “value”, “return”, “analysis” which stand for defining action and criteria for one have no equal meaning in the other. What is even more bazaar is that in most instances they do not understand why they don’t understand each other as they each believe they are perfectly correct in their views of assessing investment opportunities.
I am a Value investor. There are truly very few of us vs. other investors. My guess is less than 2%.
Mark-to-Market accounting is an abomination of reasoning during periods of market disruption such as we just experienced when the SEC banned short selling. Unfortunately, there are more of them than us, but fortunately the market will and is currently righting itself even with the mistakes we have made and continue to make. Philosophically we need the majority of investors to not get it right so that us few can take advantage of the deep discounts not produced in any other way.
All will be well even if the current stimulus package is passed. It may just take longer.
So, there is a chart and a story going around regarding Berkshire’s (BRK.A) Warren Buffett that just does not jive to me. Hat Tip to “Davidson” for pointing bringing it to my attention..
First, here is the chart:
Here is the story that follows:
Fortune Magazine) — Is it time to buy U.S. stocks?
According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy – its GNP.
Fortune first ran a version of this chart in late 2001 (see “Warren Buffett on the stock market“). Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.
But he visualized a moment when purchases might make sense, saying, “If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you.”
Well, that’s where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham’s statement about the stock market: “In the short run it’s a voting machine, but in the long run it’s a weighing machine.”
Not just liking the chart’s message in theory, Buffett also put himself on record in an Oct. 17 New York Times op-ed piece, saying that he was personally buying U.S. stocks after a long period of owning nothing (outside of Berkshire Hathaway (BRKB) stock) but U.S. government bonds.
He said that if prices kept falling, he expected to soon have 100% of his net worth in U.S. equities. Prices did keep falling – the Dow Jones industrials have dropped by about 10% since Oct. 17 – so presumably Buffett kept buying. Alas for all curious investors, he isn’t saying what he bought.
To examine this we need to go back the beginning.
One must remember that in the late 1960 Buffett closed the “Buffett Partnership” because at that time he felt “there were no values” in the general stock market. Yet, according to both the chart above and the story, Buffett would have been buying at this time.
If we fast forward to the mid 1970’s, a time when Buffett said he felt like “a guy in a whorehouse with a suitcase of cash” because stocks we so cheap, we see the above charts value level was actually below 50%. In fact, most of the largest positions in Berkshire’s portfolio, American Express (AXP), Coke (K), Gillette now PG (PG) and The Washington Post (WPO) were accumulted during this time. In fact, Buffett’s buying continued through the 1980’s and until the mid 1990’s when he then found equity values were overpriced, refrained from buying during the tech bubble and was called “out of touch” (he was later proven very right).
Again, looking at the chart we see during that at this time frame the chart values had crept back to the 75% level of the mid 1960’s when Buffett was a seller.
What is inmportant to note and what has been lost in the “Buffett is buying rhetoric” is that Warren’s three largest recent investments, totaling roughly $10 billion, Dow Chemical (DOW), GE (GE) and Goldman Sachs (GS) were NOT stocks purchases, they were preferred investments.
Essentially Buffett is betting their share prices will all rise, in the next 3 to 5 years, when the convertibles convert to common stock. Until then, he has a bond paying 10%. With Treasuries paying essentially nothing, Buffett has found a vehicle that pays 10% to park his cash.
Did Buffett pen the link article above? Yes. To be sure Warren is buying an interest in US companies as witnessed above, just not their common stocks (except Burlington Northern (BNI)).
Buffett’s preferred purchases are not an endorsement of cheap US equities, if anything it says he would rather be a bondholder than an equity one……for now.
Disclosure (“none” means no position):Long Dow, GE, none
My readers, named “Davidson” by me has submitted the following piece…
He writes:
The panic in Obama’s recent speeches as he attempts to railroad the Democratic spending bill is without thoughtful analysis. Unfortunately, this reflects the misunderstandings of his advisors who believe that throwing spending at the lack of liquidity is the solution.
How wrong can so many people be!!!
The issue is that Mark-to-Market is providing a false view of the value of assets. Brian Wesbury and others have suggested a “Cash Flow” methodology, i.e. if the debt security is paying its interest and principal streams then it should be valued according to the risk of non-payment along bonds that are paying. This is a simple model and one that can be trusted as it is based on the realities of commerce.
This does not require another $800bil of spending. This requires 20min of discussion and a flip of the accounting switch. We may need a few guarantees as well.
Just where do we get people who cannot see the simplicity of this! It is Mark-to-Market that has caused many $billions of write offs. These need to be reversed and then let the market pricing mechanism get to work.
It is frustrating to watch so much intelligence go to waste and even do great damage because they are panicked.
There were many similarities, 1987 vs. 2008. To understand the dynamics will lead to understanding how a quick recovery is possible this time around.
Both 1987 and 2008 had a period of debt accumulation to enhance investment returns with leverage. Then it was a series of LBO’s. This time the debt was elsewhere but the main point is that part of the market was over-levered.
In 1987 the trigger for the crash was one Dan Rostenkowski, Dem-IL, Chairman of the House Ways and Means Committee, who angered that LBO’s were causing labor reductions to produce gains for the financially privileged introduced a retroactive tax law which would be in effect as of Jan 1 of 1987. This law if enacted would make all the year’s LBO’s uneconomical. It was changing the tax laws after much had occurred. He did the same in 1986 to completely rewrite the tax law as it pertained to tax shelters thus making them no longer as attractive and thus helped kick the S&L’s into a swan dive that resulted in a major bail out because the S&L’s had already closed on deals which now resulted in immediate losses.
The 1987 proposed legislation came out of committee late on Oct 13th, the market began to slide. The slide continued the 14th&15th (Thurs&Fri) but many were as yet unawares of the proposed law. They found out over the weekend as the news spread and a 10 sigma event began in Europe and hit us on Oct 19th with the help of “Portfolio Insurance” which was run by computers, never designed or tested for a massive sell off and in fact multiplied the sell off in the subsequent crash. Only one keen observer, Robert Bartley of the WSJ wrote about this at the time. The rest of the word did not understand what truly happened. A single individual had attempted to change the investment rules over night. Rostenkowski let the legislation die quietly.
The crash of 2008, i.e. what happened in Oct.&Nov., was also the work of one individual changing the playing field in a market already fragile. This was one SEC Chairperson Chris Cox who had eliminated the short sale rule saying he did not have the capacity to monitor the market in June 2007, then decided to ban the only defensive tool HF’s had to limit portfolio volatility w/levered positions of 20:1. He banned short selling. Now the HF’s were forced to sell levered positions outright, banks called margin for fear of losses and the market hit a vacuum. Cox changed the playing field and the participants had to adjust as quickly as possible. Just as in 1987.
Most will not see it this way. Most will point to the build up of debt in HF’s, sub-prime lending, the extraordinary period of Greenspan’s cheap money, the mistakes by certain regulators, the avarice of certain politicians and the mortgage agencies, but this was not an economic collapse. This was an economic slowdown and had begun at the end of 2005 when auto and home sales had peaked.
We were in an economic slow down with financial institutions at risk and we were in an orderly correction when Cox changed the rules and the wild collapse shattered investor confidence.
What we have today is shattered trust. No one knows what the rules are at the moment. It is not that liquidity is not available. It is that liquidity is not moving about the system. People with reasonable credit scores cannot buy cars or houses at the moment because of the fear of the unknown that was inspired by Cox’s single thoughtless decision.
Yes, jobs are being lost not because individuals are over levered, but more because of the fear of lending the copious funds that are available. Ah yes. There is also the issue of the Mark-to-Market rule that was never expected to see an overnight change in value as we have seen. Cox should have suspended this but did not. Mark-to-Market was meant to be a helpful investor tool in an orderly declining market place, something to keep the financial institutions honest. When Mark-to-Market valuations are registering default levels for perfectly healthy securities then you know the rule should be modified.
Much of the value destruction today is the result of accounting rules designed for a functioning market pricing mechanism meeting a frozen market pricing mechanism because one person changed the playing field.
This is not a Depression and does not even have to be a Recession. It is solvable. The rules have to be modified to produce fair valuations and to get pricing mechanisms working again. The head of the SEC can do this. It is quite simple.
Trust is what is missing. We need to revive it.
“Davidson” is the pseudonym for a reader who must remain anonymous…..
< I have named my optimistic and very intelligent new writer “Mr. Davidson”. It is a brilliant pseudonym and maybe someday I will be able to explain it.
Davidson Writes:
If you learn the effect of psychology on markets you will come to know that you cannot predict bottoms or tops. These are unpredictable turns in market psychology and is directly tied to the use of margin in how fast greed can turn to fear. No one has a handle on this although many claim to have modeled some market behavior or other only to have a 10 sigma event prove the model wrong. Long Term Capital is the most well known, but lately the market is strewn with disproved models. AIG hung its hat on a model by a Wharton/Yale professor and “poof”
You cannot model human behavior. You can observe, you can place a historical deviation to it, but you better not hang 20xleverage as so many have done and lost.
There is no better indicator of market psychology than the Treasury yield chart. All maturities are rising. This reflects substantial flow of funds into other opportunities. If fear still ruled, you might see the longer term maturities rates rise while the T-Bill rates remained low or even turn negative once again. Not so. All maturities show fund outflows. THIS IS THE TURN!
Buffett recognizes this among others.
He also provides the following chart:
Of it he says:
We have already witnessed a return to par of the LQD ETF(Invest Grade Corp) and a substantial rise in the HYG ETF(HiYield Corp) as well as rises in all the indices since November. House sales appear to be finding a bottom, The insider buying is extraordinarily high, investor and consumer pessimism at record 30yr+ levels, savvy investors announce new commitments(Buffett, Ackman, Berkowitz, Cumming and many not as well known) weekly.
Changes are there for all to see if only they would give up listening to the endless stream of negative headlines. Markets turn without fan fair in the gloom of pessimism. I think the best time is to invest is now.
Treasury rates are rising across all maturities as this chart from Don Hay’s recent note indicates. The best interpretation in my opinion which has been offered by only few observers thus far is that capital is flowing from Treasuries to other parts of the economy and securities markets. The desperate hoarding of cash that has been a hallmark of the current economic slump is diminishing in my view.
I remain positive that the current financial issues will be resolved and that this chart provides strong evidence for this.
Fourth-quarter 2008 earnings from continuing operations of $3.9 billion, or $.37 per share before preferred dividend, or $.36 per share attributable to common shareowners. Results included $1.5 billion of after-tax restructuring and other charges, including increased reserves in current environment, which are above the Company’s original plan and the restructuring will lower costs for 2009 and beyond.
For the year, revenue was $183 billion, up 6%, and earnings were $18.1 billion, down 19%. This was the third highest earnings year in GE history.
“In a very tough environment, we delivered fourth quarter business results in line with expectations we provided in December,” Chairman and CEO Jeff Immelt said. “We grew Infrastructure and Media by 3% in the quarter and 10% for the year. Energy Infrastructure led the way in the quarter with 11% segment profit growth driven by continued global demand. Technology Infrastructure grew earnings by 1%, led by 21% growth in Aviation. NBC Universal segment profits declined 6% in fourth quarter as strong cable earnings were offset by declines in the local stations.
“Capital Finance earned $1 billion in the quarter and $8.6 billion for the year,” Immelt said. “We had several negative impacts to earnings in the quarter including increased loss reserves, negative marks and impairments. These charges, along with global benefits, generated a tax credit that more than offset our pre-tax loss. We also originated $48 billion of new assets in the quarter at solid margins.
“We run the company to have a Triple-A credit rating, and we have significantly strengthened our liquidity position,” Immelt said. “We generated $16.7 billion of industrial cash flow from operations, up 5%. We ended the year with $48 billion in total cash, after paying down our commercial paper balance to $72 billion from $88 billion at the third quarter. We used $5.5 billion of our equity offering to meet our stated GE Capital debt-to-equity leverage goal of 7:1 by the end of 2008. Through today, we have been able to fund $29 billion of our $45 billion long-term debt needs for 2009.
Decreased revenue, net income and earnings per share for the fourth quarter of 2008 compared to the year-ago quarter. The Company said it plans lower motorcycle shipments in 2009 and made public its overall strategy to deal with the current economic environment.
“We have a strong core business anchored by a uniquely powerful brand, but we are certainly not immune to the current economic conditions,” said Jim Ziemer, Chief Executive Officer, Harley-Davidson Inc. “We have a clear strategy to not only deal with the economic conditions, but also strengthen our long-term operations and financial results. We are executing that strategy with confidence and conviction.”
Fourth-Quarter and Full-Year Results
Revenue for the quarter was $1.29 billion compared to $1.39 billion in the year-ago quarter, a 6.8 percent decrease. Net income for the quarter was $77.8 million compared to $186.1 million in the fourth quarter 2007, a decrease of 58.2 percent. Fourth quarter diluted earnings per share were $0.34, a 56.4 percent decrease compared to last year’s $0.78.
Revenue for the full year 2008 was $5.59 billion compared to $5.73 billion in 2007, a 2.3 percent decline. Full-year net income was $654.7 million, compared to $933.8 million in 2007. Diluted earnings per share were $2.79, a decrease of 25.4 percent compared to $3.74 in 2007. The full-year results are below the previously provided company guidance.
For the full year, wholesale shipments of Harley-Davidson® motorcycles were 303,479 units, an 8.2 percent decrease compared to 330,619 units in 2007.
2009 Shipment Plan, Gross Margins
In the first quarter of 2009, the Company plans to ship between 74,000 and 78,000 new Harley-Davidson motorcycles, a 3.0 percent to 8.5 percent increase versus the first quarter of 2008. However, for the full year 2009, the Company plans to ship between 264,000 and 273,000 new Harley-Davidson motorcycles, a 10 percent to 13 percent reduction from 2008.
“We reduced our production levels prudently in 2008, helping our dealers achieve lower inventory levels,” said Ziemer, “and we’re going to show similar discipline in 2009. That’s not only critical for the health of our business, but for our dealers’ businesses, as well.”
For the full year 2009, the Company expects gross margins to be between 30.5 percent and 31.5 percent, which compares to 34.5 percent for the full year 2008. The decrease is primarily due to an expected unfavorable shipment mix versus 2008, the allocation of fixed costs over fewer units, and expected unfavorable foreign currency exchange rates versus 2008. Given the volatility of the current economic environment, the Company also indicated it would not provide EPS guidance for 2009.
Strategy for the Current Economic Environment
The Company is executing a three-part strategy that includes a number of measures to deal with the impact of the recession and worldwide slowdown in consumer demand, with the intent of strengthening its operations and financial results going forward.
“Our strategy is focused on three critical areas: to invest in the Harley-Davidson brand, get our cost-structure right, and obtain funding for HDFS to help our dealers sell motorcycles and our retail customers to buy them,” said Ziemer.
They both run the gamut of customers, GE more corporate and HOG pure consumer. Both are great companies and both are struggling while still profitable. Long term both will be just fine. BUT, this year, I think significant downside is possible. Now, that only means a fantastic buying opportunity later, not the end of the world.
One of the best traders I follow sees GE hitting $7 or $8 in Q2. Here is UpsideTraders site. Should GE be forced to cut the dividend or lose its AAA rating, this is all but assured (that and Immelt is out of a job). As much as GE says it will not, they also said full year earnings were “in the bag” when they were not. Until they fix the credibility problem, anyone saying anything from Fairfield will be look at very skeptically.
That being said, even if they cut is 50% to $.62 annual, at $8 a share that is a nice 7% yield, still a screaming buy. I just cannot commit new money there now until I get some evidence to the contrary.
HOG is the consumer, simple. The consumer is not going to be bailed out this year. So, because of that, we should not expect HOG to be. BUT, should it continue to drift into single digits, not buying it for an IRA to tuck away would be very difficult. They still are the best at making a one of a kind item and have brand loyalty like to other (until I see the Apple (AAPL) logo tattooed on folks, HOG has them beat). That being said, once credit issues are resolved, one can expect good results to follow immediately.
So then, what? Stuff in the ground, oil (USO), (DBO), (DXO), gold (GLD), (UGL) and silver (SLV). We need all three, they do not need credit for their value (one could argue tighter credit is a positive here, miners cutting back due to lack of credit decreases supply, bullish for prices), and are necessary.
Yes, as the economic recession has slowed demand for all, BUT, supply is also being taken off the market almost as fast AND demand will resume well before the current production being taken off the market can catch up. That means a spike in prices.
For all three there is also the specter of corporate and government debt and possible worldwide defaults. Mish says that there is a crisis looming and that currencies will take the fall. Gregor McDonald says that when that happens, money will flow to currencies without borders or governments, gold, silver and (maybe) oil.
Cash is not such a bad thing to have right now. Think of it this way, if deflation is running 2%, and you can get 2% on a CD, that is a real return of 4% in purchasing power. That and locking it up for 6 months might stop us from doing something dumb with it…
Either way, I think one has to think that something dramatic is coming….one way or another..
Sen. Bob Casey Jr. (D- Penn) has asked a federal agency to find Harley-Davidson (HOG) eligible for funds handed out under a federal bailout for financial institutions. In a Jan. 16 letter to Federal Deposit Insurance Corp. chairman Sheila Blair, saying Harley-Davidson recently inquired whether its financing company and subsidiaries — Harley-Davidson Credit Corp. and Eaglemark Savings Bank — are eligible for the Temporary Liquidity Guarantee Program, or TLGP.
“Without access to TLGP, Harley-Davidson may be forced to make tough decisions that will impact workers in Pennsylvania, jeopardize the local economy … and negatively impact the state economy,” Casey wrote in the letter. Casey said he wants to do everything possible to make sure Harley’s financial arm has access to help if it’s eligible.
He said the problem with the economy is related to credit, and Harley’s participation in the program would allow more people to get Harley loans to buy motorcycles. “Without the determination (of eligibility) made, it puts their financing company in a much more precarious situation,” he said.
In October, in an attempt to improve confidence in the banking sector and to improve liquidity for banks, the FDIC started the program to guarantee newly issued unsecured debt of qualifying institutions and guarantee certain noninterest-bearing accounts.
Guarantee debt: Harley spokesman Bob Klein said the program would guarantee unsecured corporate debt against default; Harley would only get federal funds if a customer defaulted on his or her motorcycle loan.
Klein said the TLGP is one of several options that Harley-Davidson’s financial arm is pursuing “to ensure continued funding of its lending activities” in a challenging economic environment. Lower consumer confidence has affected the motorcycle industry, he said.
The Wisconsin-based company told elected officials in Pennsylvania and Wisconsin about its plans to seek inclusion in the program, Klein said. The company appreciates Casey’s support, he said.
A recent dealer survey shows that year-over-year retail sales appear to have softened from the third quarter, when Harley-Davidson reported a 15.5 percent drop in U.S. retail sales. The company is expected to report fourth-quarter results Friday.
Now, this is government programs run amok. It is one thing to backstop the debt of the compnay to lower borrowing costs, but to backstop its customers? Insane…
Do we really expect corporations to increase lending standards in an effort to avoid another fiasco like we are going through when taxpayers are backing the loans they are making now? Do we really?
What’s next, guaranteeing the debt we use for dishwashers at Home Depot (HD) or Sears (SHLD)?
Harley-Davidson, Inc. (NYSE:HOG) announced today that President and Chief Executive Officer James L. Ziemer has informed the Board of Directors that he intends to retire in 2009, capping a 40-year career with the Company. The Board of Directors has formed a search committee to review both internal and external candidates. Ziemer will remain in his current role until a new CEO is in place.
“Jim Ziemer has dedicated his entire professional career to Harley-Davidson and has been a great advocate for the Company,” commented Board Chairman Jeffrey L. Bleustein. “All of us who have worked with Jim throughout the years have benefited from his leadership, his selfless commitment to the Company and his contributions to making the brand one of the most admired and successful brands in the world. As an avid and lifelong motorcyclist, Jim also exemplifies the great legacy and spirit of Harley-Davidson.”
Ziemer is a native Milwaukeean who grew up in the neighborhood next to Harley-Davidson’s original Milwaukee factory location on the city’s west side. He started with the Company in 1969 as a freight elevator operator while attending the University of Wisconsin-Milwaukee. Upon earning his undergraduate degree in accounting at UWM, he joined the accounting department where he spent the majority of his career. He was named the Company’s Chief Financial Officer in 1990. In 2005, he was named President and Chief Executive Officer of Harley-Davidson, Inc. Ziemer also serves on the Board of Directors of Textron, Inc.
“Working at Harley-Davidson has been an honor and privilege and has fulfilled a life-long dream for me,” said Ziemer. “I am extremely proud of what our outstanding team of employees and dealers has accomplished together. There is always new and exciting work to be done on Harley-Davidson’s epic journey, and I have great confidence that the powerful combination of our employees, customers and dealers around the world and their passion will continue to fuel the strength of the brand. I am delighted to be able to spend more time with my family and am enthusiastic about the Company’s tremendous opportunities and its prospects for success in the years to come.”
Why maybe the “Car Czar”? Unlike the US auto makers like Ford (F) and GM (GM), Harley Davidson has had a very successful labor union relationship. That is not to say it has been all roses, union relationships never are, but it is to say that both side have profited handsomely from the arrangement, unlike the auto manufacturers.
That fact alone makes Ziemer the perfect person for the post. He will have little patience for management that turns out inferior products (and way too many lines of them) and the same intolerance for labor unions that want to enrich membership at the expense of shareholders and the company’s viability.
Because of his success at Harley Davidson, either side would be hard pressed to object to his appointment unlike GE’s (GE) former CEO Jack Welch, who’s name has been tossed in the ring but would face strong union objections because of his stance on them. Personally I think Welch would be great but realities just will not allow it.
Harley Davidson (HOG) files it 10-Q and in it are shipment details that show an interesting story
Here is the applicable portion.
Now, the bad news is obviously sales have fallen. The good news is that the two areas the company is targeting for growth, international and sport are doing just that, growing.
While it won’t cure what ails the company now, it does mean that the strategy for the future is indeed working. When the US does recover, and it eventually will, HOG will be that much further ahead that where it was when this all started.
Sherwin Williams (SHW) beat “analyst” expectations by 23 cents a share or 18%.
– Sales increased 3.3% to a record $2.269 billion in 3Q08 and 2.1% to a record $6.280 billion in first nine months – EPS was $1.50 in 3Q08; $.05 above the 3Q08 guidance range of $1.20 to $1.45 – Net operating cash in the first nine months was $592.6 million; an improvement of $28.8 million over the first nine months last year – EPS guidance range of $.40 to $.60 for 4Q08 and raising full year guidance range to $3.97 to $4.17
All segments experienced sales increases: * Net sales in the Paint Stores Group increased $9.5 million, or 0.7%, to $1.410 billion in the quarter and decreased $20.6 million, or 0.5%, to $3.797 billion in the first nine months. The sales increase in the quarter was due primarily to increased sales from acquisitions of 1.5% and selling price increases that were partly offset by sales volume reduction * Net sales of the Consumer Group increased $6.2 million, or 1.8%, to $355.7 million in the quarter and decreased $20.8 million, or 2.0%, to $1.026 billion in the first nine months. The sales increase in the quarter was due primarily to selling price increases and an increase in sales of 0.4% related to a 2007 acquisition. * The Global Finishes Group’s net sales stated in U.S. dollars increased $55.8 million, or 12.5%, to $500.8 million in the quarter and $170.1 million, or 13.3%, to $1.452 billion in the first nine months due primarily to volume gains, selling price increases, favorable currency translation rate changes and acquisitions.
The Company acquired 793,135 shares of its common stock through open market purchases during the quarter and 7.0 million shares during the first nine months. The Company had remaining authorization at September 30, 2008 to purchase 20.0 million shares.
CEO Christopher Connor said, “During the fourth quarter of 2008, we anticipate consolidated net sales growth, in percentage terms, will be plus or minus in the low single digits from last year’s fourth quarter. We expect diluted net income per common share for the fourth quarter will be in the range of $.40 to $.60 per share compared to $.80 per share last year. For the full year 2008, we anticipate consolidated net sales will be slightly higher than 2007. At that sales level, we are raising our expectations for diluted net income per common share for full year 2008 to a range of $3.97 to $4.17 per share compared to $4.70 per share earned in 2007.”
Would I be a buyer of Sherwin shares here? No. Not because they are not a great company or their shares are not undervalued, it is just that I think there are some extreme values out there currently and Sherwin is not an extreme value. The dividend yield at 2.8% is good, but again, far below the 7% at Dow Chemical (DOW), 6% at GE (GE) and 5.8% at Harley Davidson (HOG). Now, should share dip into the mid 40’s ($45) then I would have to take a close look.
Also, despite the title of the post, Sherwin is tied to housing and that is not going anywhere but flat or down for at least a year, maybe more. That being said, Sherwin’s results will remain stable due to fantastic management and it’s brilliantly timed international expansion so the downside from here is limited. Should shares be sitting here at these levels 6 months to a year from now, perhaps they then warrant a buy.
There are just to many truly magnificent bargains out there now…
On average, analysts were expecting Harley Davidson (HOG) to record a 79 cents per share on revenue of $1.42 billion. HOG had exceeded analysts’ profit estimates in three of the last four quarters.
Shipments are down are credit has further tightened.
Milwaukee, Wis., October 16, 2008 — Harley-Davidson, Inc. (NYSE: HOG) today announced its results for the third quarter ended September 28, 2008. Revenue for the quarter was $1.42 billion compared to $1.54 billion in the year ago quarter, a 7.7 percent decrease. Net income for the quarter was $166.5 million compared to $265.0 million in the third quarter 2007, a decrease of 37.1 percent. Third quarter diluted earnings per share were $0.71, a 33.6 percent decrease compared to last year’s $1.07.
“In the U.S., dealer retail sales of new Harley-Davidson motorcycles in the quarter were in line with our expectations,” said Jim Ziemer, Chief Executive Officer of Harley-Davidson, Inc. “Although Harley-Davidson retail motorcycle sales in international markets overall continued to grow double digits in the quarter, unit sales in several European countries slowed more than we anticipated during September as a result of deteriorating economic conditions. We continue to carefully monitor all markets in light of the potential impact of the current economic realities.”
For the full year 2008, the Company has narrowed its shipment expectations to 303,500 to 306,000 Harley-Davidson motorcycles. The Company has narrowed its expectations for diluted earnings per share for the full year to $3.00 to $3.10 from the prior range of $3.00 to $3.18.
“We also have been able to maintain Harley-Davidson Financial Services’ position as a stable, consistent source of financing for dealers and retail customers during these turbulent conditions in the credit markets,” Ziemer said. “Prudent management and customer access to credit will continue to be priorities at HDFS.”
“During the third quarter, we completed our acquisition of Italian motorcycle maker MV Agusta Group, expanding our opportunities in Europe. Our 105th Anniversary Celebration at the end of August drew tremendous, highly enthusiastic crowds. And we opened the Harley-Davidson MuseumTM, with its broad appeal to riders and non-riders alike. So even in the midst of economic uncertainty, we continue to broaden our appeal, plant seeds for the future and give people unparalleled experiences and reasons to ride,” Ziemer said.
“Going forward, we expect the global economy and consumer concerns to continue to create challenges for Harley-Davidson through the end of the year and in 2009. I remain confident about our future as we continue to manage and reinvest in the business,” said Ziemer.
Motorcycles and Related Products Segment – Third Quarter Results
Revenue from Harley-Davidson motorcycles was $1.05 billion, a decrease of $131.7 million or 11.1 percent versus the same period last year. Shipments of Harley-Davidson motorcycles totaled 74,704 units, a decrease of 11,831 units or 13.7 percent compared to last year’s third quarter.
Revenue from Parts and Accessories (P&A), which consists of Genuine Motor Parts and Genuine Motor Accessories, totaled $259.0 million, an increase of $7.5 million or 3.0 percent over the year-ago quarter. Revenue from General Merchandise, which consists of MotorClothes® apparel and collectibles, totaled $84.0 million, an increase of $0.8 million or 1.0 percent over the year-ago quarter.
Gross margin for the third quarter of 2008 was 34.0 percent of revenue compared to 38.4 percent for the third quarter last year. This decrease is primarily due to higher product costs and the allocation of fixed costs over fewer units than last year’s third quarter. Third quarter operating margin decreased to 16.4 percent from 23.2 percent in the third quarter of 2007. Operating margin for the third quarter of 2008 includes the impact of a one-time $16.6 million expense related to the value of acquired in-process research and development at MV Agusta Group.
Motorcycle Retail Sales Data
During the third quarter, worldwide retail sales of Harley-Davidson motorcycles decreased 9.6 percent compared to the third quarter of 2007. U.S. retail sales of Harley-Davidson motorcycles decreased 15.5 percent for the quarter. The heavyweight motorcycle market in the U.S. decreased 3.1 percent for the same period.
Retail sales of Harley-Davidson motorcycles grew 11.3 percent in the Company’s international markets during the third quarter of 2008 compared to the third quarter of 2007. Third quarter retail sales increased 12.4 percent in Canada; the Europe Region was up 2.9 percent; the Asia Pacific Region was up 17.5 percent; and the Latin America Region was up 41.6 percent.
During the first nine months of 2008, worldwide retail sales of Harley-Davidson motorcycles decreased 6.0 percent compared to the prior year. In the U.S., Harley-Davidson motorcycle retail sales decreased 11.9 percent for the first nine months of the year while the U.S. heavyweight market was down 4.0 percent for the same period. International retail sales increased by 12.6 percent for the first nine months of 2008.
Third quarter and year-to-date data are listed in the accompanying tables.
MV Agusta
On August 8, 2008, the Company completed the purchase of the privately-held Italian motorcycle maker MV Agusta Group. The Company acquired 100 percent of MV Agusta Group shares for total consideration of 68.3 million euros ($105.1 million), which includes the satisfaction of existing bank debt for 47.5 million euros ($73.2 million). As a result of the acquisition, the Company recorded $87.9 million of goodwill and the $16.6 million one-time expense related to the value of acquired in-process research and development. These results are included in the quarterly financial data.
Financial Services Segment
Harley-Davidson Financial Services (HDFS) operating income for the third quarter was $35.6 million, a decrease of $13.9 million or 28.0 percent compared to the year-ago quarter. The decrease is primarily due to a $9.4 million write-down of finance receivables held for sale to fair value. In addition, last year’s third quarter included a $3.5 million securitization gain compared to no securitization transaction during the third quarter of 2008.
Income Tax Rate
The Company’s third quarter effective income tax rate was 38.2 percent compared to 35.5 percent in the same quarter last year. The third quarter increase was due primarily to a non-deductible in-process research and development charge for MV Agusta Group and the expiration of the federal research and development tax credit as of December 31, 2007. In October 2008, the federal research and development tax credit was reinstated for two years retroactive to January 1, 2008 continuing through December 31, 2009. The Company expects its full year effective income tax rate in 2008 will be approximately 35.5 percent.
Harley-Davidson, Inc. — Nine Month Results
For the first nine months of 2008, revenue totaled $4.30 billion, a 0.9 percent decrease from the year-ago period. Diluted earnings per share were $2.45, a decrease of 16.9 percent compared to the same period last year.
Through the first nine months of this year, shipments of Harley-Davidson motorcycles were 226,898 units, a 9.0 percent decrease compared to last year’s 249,413 units. Harley-Davidson motorcycle revenue was $3.26 billion, which is down 2.2 percent compared to last year’s $3.33 billion. P&A revenue totaled $706.6 million, a 0.5 percent increase over last year’s $703.1 million. General Merchandise revenue totaled $244.8 million, a 5.5 percent increase compared to $232.0 million during the same period in 2007.
HDFS operating income was $107.7 million, a 38.0 percent decrease from last year’s $173.6 million.
Cash Flow
Cash and marketable securities totaled $504.9 million as of September 28, 2008. Cash used by operations was $221.2 million, and capital expenditures were $153.7 million during the first nine months of 2008. For the full year of 2008, capital expenditures are still expected to be between $235 million and $250 million.
Stock Repurchase
The Company repurchased 2.5 million shares of its common stock at a cost of $100.1 million during the third quarter of 2008. On September 28, 2008, the Company had 232.8 million shares of common stock outstanding.
As of September 28, 2008, there were 16.7 million shares remaining on a board-approved share repurchase authorization. An additional board-approved share repurchase authorization is in place to offset option exercises.
So, the bottom line is that if you are selling anything that requires credit to purchase it, things are going to be tough. The question then is, what is management doing to position the company for the inevitable improvement? CEO Zimmer is buying back shares at depressed prices, making international acquisitions at reduced prices and expanding the company’s product line.
All these are great moves while the company remains solidly profitable. Merchandise and parts revenue continue to grow. International sales are growing double digits. The drag is US domestic sales and HDFS. Eventually we get an improvement here. Even if 2009 just manages to be stagnant in the US, the other segments will propel EPS growth for the year.
Another point, at current levels ($24 and change), the shares carry with them a 5.38% yield that is very safe. The company will spend roughly $310 million next year on dividends and are buying back about $400 million a year of stock. The buybacks will be stopped before the dividend is threatened. Let’s not forget they also trade at 8 times earnings…8….
Harley Davidson (HOG) talked to its customers and discovered that many would rather be on three-wheelers than two-wheelers. So, they responded..
Called the Tri Glide Ultra Classic, it is an answer for bikers seeking more comfort and stability on the road. Harley-Davidson research indicates more baby boomers and women are interested in touring bikes, but they don’t want an 800-pound two-wheeler to get the best of them.
Here is a video of the news bike. The video is a little rough but gives god detail on the bike.
This is a great move. It instantly expands their market as the boomers age, still love riding but felt unsure about being able to handle their bikes. With things slowing Harley has responded by producing more Sportsters, smaller more fuel efficient models under $10,000 and now the 3 wheeled bike to expand its older demographic.
Is it a magic pill for slumping sales? No. Will it help? Most definitely. Study after study has shown that riders, once they begin riding Harley Davidson, do not switch to other brands. The cheaper Sportster will reduce the barrier to entry for younger riders and the three wheeler will keep them riding longer. Both are positive trends.
Headed back to New Hampshire next week. Last years trip was a profitable one in that it enabled me to avoid making a mistake in buying Harley Davidson (HOG) shares back then.
I was considering a purchase of HOG shares when I stopped into a huge dealership in Laconia, NH last August. It is either Laconia or Meredith, I’m not sure where the border actually lies…
I wrote after that trip: “One thing immediately struck me. Evey single bike in the store, almost 100 had the same tag on it “Priced Below MSRP”.
I casually asked a salesperson, “What is going on, why is everything on sale”? He replied “can’t move ’em and the new models are coming out”. HMMMM
When I asked why he though they were not selling he replied that most people had been upgrading the last few years with two things, house money (home equity) or Harley financing which is now getting harder to get and much more expensive. He said that because of this people are either sticking with the bikes they have much longer and those who are buying, are buying cheaper, lower margin bikes. For instance, a bike that was selling for $10,000 last year was being offered below $8,000 yesterday. Both of these are very bad for Harley.
When I asked what would happen if he can’t move the old models when the new ones come out, he said that they will just cut back the new model orders. Even worse for Harley.
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.
Be patient and you may get a fantastic buy, later… “
So I waited…and waited until January and picked up shares at $37.96 which, unless they drop again is at levels not seen since 2003. They sit at $42 and change now for a 13% return (including dividends).
The story here is not a savvy pick but a mistake avoided by doing a little extra homework and asking a few questions of folks and the middle of the situation. Had I purchased shares then I would be sitting on a 20% loss.
Harley Davidson is still a one of a kind company with a one of a kind product. They are growing almost 20% internationally and are diversifying into the sport bike market. There isn’t anything not to like.
I will visit the dealership again next week. My hope is bikes are moving and are not marked down. If that is true then my decision is whether to buy more now. If they aren’t moving and are significantly discounted, we may see another dip in shares. In that instance, I may pick up more later. Selling shares after getting them at purchase price I got is not in the cards for a very long time…….
