Why Harley Is Picking Up Speed


By Gene Marcial After skidding from $55 a year ago to $35 on March 6, 2003, Harley-Davidson (HDI) is on the road again -- and cruising to higher ground. The stock has since rebounded to $44. Among the many things that buffeted the shares were tough economic times -- and management's own guidance in the fourth quarter that 2003 motorcycle production will be flat.

"Investors interpreted that as a sign (wrongly, in our view) of flagging retail and consumer demand," notes Joseph Yurman of Bear Stearns, who rates the stock outperform. True, sales in this year's first quarter dipped 3.2% from a year ago, due mainly to bad weather. But management, says Yurman, insists that demand for Harley bikes "remains strong."

He has checked with dealers around the country, and, indeed, he says they confirmed that inclement weather had helped dampen sales. Dealers' outlook for the rest of 2003 and beyond was "uniformly bullish," says the analyst. Nearly all of the dealers who blamed bad weather for lower sales say conditions have improved of late.

SUSTAINABLE BENCHMARK. Yurman says he believes that management's focus is on ensuring sturdy long-term performance, and he recommends investing in Harley because of its "dominant industry position, strong cash-flow-generating abilities, and impressive return on invested capital." Indeed, Harley's 2002 performance helped propel it to No. 37 on BusinessWeek's list of the top 50 performers in the S&P 500-stock index (see BW, 3/24/03, "Harley: A Good Time for a Ride?").

Harley CEO Jeff Bleustein, addressing a group of investors at a Bear Stearns conference on Apr. 28, noted the "seasonality" of the retail motorbike business, but he emphasized that the gap between supply and end-user demand remains too large. So Bleustein thinks that high single- to low double-digit production growth is a sustainable benchmark for Harley. Bear Stearns is associated with the Big Board specialist that makes a market in Harley shares and who may have a position (short or long) in the stock.

The number of shorted shares climbed 23% in March, to 18.1 million shares, amounting to a short-interest ratio of more than 7 times, notes Bernard Schaeffer, who heads Schaeffer Investment Research. However, to the bulls, such a high amount of shorted shares isn't necessarily a negative, since the shorts would have to buy shares to cover their positions if the stock rallies strongly.

WAITING FOR FAT BOY. Also high on Harley is Anthony Gikas of U.S. Bancorp Piper Jaffray, who rates the stock outperform. His own survey of dealers also suggests strong demand despite the weak economy. He thinks demand will outstrip supply materially through 2004. The analyst notes that the waiting list for the motorbikes averages about eight months, and for the most popular bikes, such as Fat Boy and Road King models, it's two to four years. Gikas' 12-month target price is $54, and he estimates that Harley will earn $2.34 a share in 2003 and $2.64 in 2004, vs. $1.90 in 2002.

Standard & Poor's analyst Tom Graves figures that sales will increase 13%, to $4.6 billion in 2003, up from $4.1 billion in 2002. Contrary to earlier belief that production will be flat in 2003, Graves estimates that Harley will ship about 291,000 bikes, up 10% from 2002's 263,653.

With the economy showing some signs of revving up, even nasty weather may not cool the ardor of the customers waiting to purchase Harleys. Marcial is BusinessWeek's Inside Wall Street columnist


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