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Harley Davidson: The Good and The Bad

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Step into Harley Davidson's shoes for a second and review its third quarter numbers...

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Remember that Harley Davidson (HOG) revised numbers lower in early September, so the small "beat" is vs. negatively revised numbers and the guidance is unchanged from a month ago for 2007. Also, since HOG can force products on dealers, retail sales are a better gauge of the health of the business than wholesale sales… worldwide Harley motorcycle sales fell 0.2% y/y (US -2.5%, international +8.8%) for the Q, basically in line with expectations and suggesting that September was likely down about 10% y/y (according to UBS calculations), worse than +24% in July but better than -22% in August. Nothing in the results or guidance changes my view on the company's prospects, which remain negative. Shares are not expensive at 13x 2007E but "E" remains at risk, particularly for 2008 where numbers suggest a recovery in sales.


The Good:

  • Results are fairly consistent with problems discussed in early September when HOG announced lower planned motorcycle shipments for the rest of 2007. This is as expected, but there was risk of another negative revision.
  • Revenue (-5.8% to $1.54 bln) beat cons of $1.52 bln.
    • Motorcycles and Related Products Segment: Revenue -8.6%, Shipments -10.8% to 86,535 units.
    • P&A: rev +1.2%
    • General Merchandise: rev +16.7%
  • Earnings pre share (-10.8% to $1.07) beat cons of $1.05/$1.06.
  • Unchanged guidance is similar to consensus and suggests that any estimate revisions today will be small.
    • 2007 guidance (identical to #s provided early last month) calls for (1) a FY '07 shipment range of 328,000 to 332,000 motorcycles vs 349,196 units in 2006 (2) a modest decline in revenue (3) lower operating margin (4) EPS drop of 4-6% from $3.93 last year. This implies $3.69-$3.77 and is in-line with consensus of $3.73.
    • 2008 guidance calls for (1) moderate revenue growth, (2) lower operating margin and (3) EPS growth of 4-7% (implying $3.84-$4.04). Consensus is $3.87, suggesting, as mentioned above, that revisions today will likely be small.
  • Income Tax Rate Slightly Lower Due to R&D Credit: Rate was 35.5% vs 36% last year.
  • Cash Flow remains positive & well above dividend level (yield 2.46%)
    • Year to date CFO $1.37 bln
    • YTD capex $139.4 mln (full year expected $250-275)
  • Stock Repurchase Accelerated in 3Q:
    • 3Q: 9.7 mln shs or $509 mln
    • YTD: 17.3 mln shs for $1 bln
    • Remaining authorized: 6.2 mln


The Bad:

  • Revenue declines contributed to de-leveraging:
    • Gross margin: 38.4%, down 150 bp
    • Operating margin: 23.2%, down 330 bp
  • Retail sales trends remain weak at -0.2%:
    • U.S. retail sales -2.5% vs industry heavyweight market -4.4%
    • International retail sales +8.8% (Europe +10.7%; Canada -7.7%; Japan +9.1%; Other +20.8%)
  • Harley-Davidson Financial Services (HDFS) operating income fell 10.4% due to a lower securitization gain y/y.
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Position in HOG

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