Harley On A Long Cruise

HARLEY-DAVIDSON PAINTED A GLUM PICTURE FOR 2008, after reporting weaker-than-expected first-quarter profits two weeks ago, and lowering guidance for 2008. The Milwaukee motorcycle maker (ticker: HOG) now sees earnings per share falling by 15% to 20% this year, to $3.00 to $3.18 a share, from last year's $3.74. The company previously had forecast an '08 increase of 4% to 7%.

Harley's troubles, which it blamed on economic weakness, aren't a surprise; as a purchase, a Harley is about as discretionary as it gets. But neither is the news as dour -- for the company and its shares -- as the numbers might suggest.

Barron's warned, in a positive piece late last year, that Harley's ride in the next 12 months would be rocky ("Bound for Hog Heaven," Nov. 26, 2007). But we also said that the shares, then around 46, would rebound once the market sensed that Harley's business had troughed. The stock is down about 20%, to 38 -- but time is on the company's side.
Harley's first-quarter revenue rose 11%, to $1.31 billion, but net income fell 2.5%, to $187.6 million. Diluted earnings per share rose to 79 cents from 74 cents a year ago, mostly because of a lower share count and a strike last year.
Steven Check, of Check Capital in Costa Mesa, Calif., says that posting flat earnings in a difficult environment is "relatively OK." Check isn't selling his Harley stake, as he thinks the company's iconic brand and international sales will help its stock rebound in the longer term. Applying a historic price/earnings multiple of 15 to his forecast for per-share earnings of $4 in the intermediate term, "a target [price] of around 55 in two years seems reasonable," he says.
While Harley's U.S. retail sales fell 13% in the quarter, international revenue, now about 33% of the total, revved up 17%. Begrudgingly acknowledging such bright spots, the shares tripped on the news, but then later turned up.

Harley's recovery may take longer than Barron's envisioned, but not much longer. The company still has a 30% return on equity, a clean balance sheet and ample cash flow, observes Harley investor H. Edward Shill II, the chief investment officer of QCI Asset Management in Pittsford, N.Y. "The time to buy Harley is when everyone hates it," he says.

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