an introductory look at hog

hog is a classic american company. it's been around over 100 years; it's seen it all. the company manufactures heavyweight custom and touring motorcycles and related products. the company also owns buell motorcycle (sport and performance motorcycles) and eaglemark financial, a wholesale and retail finance unit. hog is the only major american manufacturer of heavyweight motorcycles. the company has over 1,000 dealers worldwide; and foreign business is about 20% of sales. hog employs about 9700; insiders own about 1.1% of the stock. i'll look at the industry first; then a look at hog specifically.

the recreation industry continues to suffer. less than a year ago, most 'experts' placed it among the top sectors of the us economy. of course, alot can change in a year's time. anyone familiar with the industry should not be surprised at the current weakness; companies within this group generally sell discretionary-oriented items. in other words, these are products that aren't a necessity for survival. that stated, the domestic economy has slowed markedly in recent quarters. in 2007, Gross Domestic Product (GDP) advanced 2.2%. this rate of ascent can be best described as moderate. however, little improvement, if any, is expected this year. in fact, at this point, i believe that the odds for a classically-defined recession are roughly even. weak results from the service industry (reported a short while back) add to the threat that the economy will retreat. thus, it's easy to see how recreation-oriented companies are having a hard time increasing, or even maintaining, profits. this may continue throughout 2008.

surprisingly, hog has felt the effects of a declining economic backdrop. the bike manufacturer posted an earnings decline in 2007 for the first time in quite a while. many look for a modest decline this year as well. during the december quarter, worldwide retail sales of harley bikes fell about 6%. although international sales increased nearly 18%, us comparisons dropped 14%. what's more, harley davidson financial services registered a profit decline of 19.1%, reflecting $6.4 million in credit losses. in response, many analysts look for shipments of harley bikes to drop by 3% this year, to 321,000. management has curbed production levels in reaction to the declining retail demand. thus, it is not anticipated that harley bikes will ``flood'' the retail market, which would ultimately result in bloated inventory levels, and, likely, price reductions.

hog's fourth-quarter earnings were hindered by a slowing domestic economy. the company's bottom line decreased nearly 20% during the december interim. it appears that a subdued domestic economy, reflecting the well-publicized subprime mortgage crisis, has caused the bike behemoth to hit a speed bump in the road. more precisely, worldwide retail sales of harley motorcycles declined about 6% during the period. although international sales climbed nearly 18%, us comparisons were 14% lower than last year. what's more, harley davidson financial services (hdfs) suffered a profit decline of 19.1%, due to $6.4 million in credit losses.

analysts have pared the company's earnings outlook for this year, reflecting lackluster domestic economic conditions. total shipments of harley bikes may decline about 3% this year, to 321,000. it appears that the reduced production is a savvy move by management, however. as noted above, retail sales of harley bikes have declined in recent months. thus, management has curbed production levels in reaction to the declining retail demand.

looking out 3 to 5 years, however, the earnings picture brightens considerably. the company has a healthy new product pipeline and a very loyal following, which i believe puts it in a strong competitive position. the recent earnings pullback is most likely macroeconomic in nature, with very little to do with company-specific fundamentals. therefore, i look for earnings to bounce back nicely by 2010-2012, assuming that the global economic backdrop is decent. overall, look for the parts and accessories unit to grow faster than the general merchandise division. this is great news for harley because that unit boasts the highest profit margin. what's more, hdfs should recover once the credit crisis is behind us.

harley stock, now trading at about 38, has fallen sharply in price in recent months. the lackluster december quarter probably accelerated the selling of the stock. however, in my opinion, recovery potential is wide. i would rate the company as having very good financial strength; certainly not the strongest out there, but still very good. given the opinions expounded above, a stock price for hog over 80 (trading at about 38 now) by the 2010 to 2012 timeframe would not surprise me in the least.

disclosure: none presently; i am considering purchasing hog 2010 leaps with a strike around 50, however