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Few people think of motorcycles as being a growth market. But in the U.S., the number of bikes sold is expected to increase by 25% over the next 12 months. That would make it a hot growth sector in an economy that seems to be slowing down.
Much of that growth is going to popular bikes made by Japanese companies like Honda and Suzuki. But one American standby continues to show annual percentage sales increases in the high teens year after year: Harley Davidson (
HDI
). Shareholders in the company have been living high on the hog in 2000. Since the beginning of the year, the stock, which closed at 47 7/8 on Nov. 16, has risen 49%.
All signs point to several years of steady growth for the Milwaukee-based company. Although its stock is pretty expensive now, at a price-to-trailing-earnings (p-e) ratio of 43.5, it has the look and feel of an old-fashioned growth stock.
Most of Harley's good news comes from the fact that it has fixed many of its operational problems. Demand for the machines has long outstripped supply, and it hasn't been uncommon to have to wait months for a bike after placing an order. Part of that was due to manufactured scarcity -- the high price tag and waiting period added to the brand's mystique. But part of it was due to foul-ups in the production lines at Harley plants in Pennsylvania and Wisconsin. Those problems have been solved, and the company is now producing motorcycles at full capacity.
CASH COW. That's not to say that Harleys will necessarily be any easier to buy now. Much of the increased production is going overseas. The past few years saw Harley's distribution network in Europe facing severe problems in competing with Continental big rigs, most notably BMW's expensive, powerful touring bikes. But a thorough reorganization of the European sales operations, including a corporate buyout of the previously independent Italian sales arm, has boosted the company's fortunes. "They have completely fixed their problems in Europe, and we should be seeing the results of that the next few quarters," says Tim Conder, who follows the stock for A.G. Edwards & Co. and recommends it as a buy.
But it's the U.S. market that continues to be Harley's cash cow. While the company owns some 27% of the international heavyweight motorcycle market (bikes with engines of 650 ccs or more), it owns a hefty 49% of the American market. Conder thinks sales will continue to grow, especially with the upcoming 100th anniversary of the company in 2003. "Special anniversary editions will start selling in late 2002, which means that there's a high visibility of sales for the next few years," says Conder.
One thing that Harley-Davidson doesn't have to worry about is labor problems. The company announced in November that it had signed a new seven-year contract with the union representing the employees of its York (Pa.) plant. Unlike many union negotiations that drag on through months of bitter fighting, the recent contract extension was signed even though a year was left on the previous contract. The union also won one atypical concession -- more compensation in the form of stock options. "This company has probably the best labor relations of any company in the whole country," says Conder. That comes in handy when 15% of sales goes towards labor costs.
WELL-CUSHIONED. The greatest challenge for Harley right now is to continue to increase sales without hitting a production bottleneck. To do that, a new production facility will be necessary sometime in the next few years. Conder thinks an announcement will be made sometime before the end of 2000. Where it will be placed, how large it will be, and how it will be financed will all be important variables in how the market judges its impact on the company's bottom line.
Another obstacle in Harley's way: Call them Aging Riders. Though its bikes have long been considered the ride of choice for disgruntled youth and Hell's Angels, Harley might want to use a good PR agency to get out the truth of their identities. Turns out the average Harley rider is 44 years old, has been to college (although not necessarily graduated), and has an annual income of $73,000. That's a dream demographic for most companies, but Harley's long-term future depends on attracting younger enthusiasts as well. To that end, the company purchased Buell Motorcycles in the late 1990s and now sells the Buell line of performance bikes, which appeal more to younger bikers. In the first nine months of this year, Buell revenue for the first time garnered more than 5% of overall Harley-Davidson sales.
For now, though, Harley seems to be well-tuned. In the first nine months of this year, the company produced and sold 158,000 motorcycles. Those receipts, as well as parts sales and earnings from its financing arm, added up to revenue of $2.15 billion, a 20% increase over the first nine months of 1999. For the third quarter, the company earned 27 cents per share, compared to 21 cents a share in the third quarter of 1999. Analysts expect the company to earn a total of $1.29 a share in 2001, compared to $1.10 this year.
HOT AIR? Not everyone is rushing to buy Harley's stock. Dain Rauscher analyst John Hughes gives it a neutral rating. "Management is doing everything right, and it's a superb company," says Hughes. "This is just a case of a good company whose stock is too expensive." A p-e of 43.5 is nothing in the high-tech growth stock arena. But in the world of heavyweight motorcycles, it's considered a hot air balloon waiting to burst and send investors scrambling, according to Hughes. "I love this company, but at these prices, it's too expensive," he says. "Nevertheless, I would consider any weakness in the price of the stock to be a buying opportunity."
A.G. Edwards' Conder thinks the buying opportunity is right now. He figures the stock to be worth a much higher multiple than its current position, and he thinks the price could reach $55 a share in the next 12 months. And that's just on one tank of gas.
Jaffe writes about the markets for Business Week Online in our daily Street Wise column
Questions or comments? Please visit our Ask Sam Jaffe interactive forum Edited by Beth Belton
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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