Slaughtered HOG a bargain
Posted
Oct 18 2007, 02:17 PM
by
Robert Walberg
Rating:
When someone mentions overnight delivery you think of FedEx; photocopying -- Xerox; search -- Google; and motorcycles -- Harley Davidson. I'm not a motorcycle guy, yet there's something mythical about the idea of hopping on a big Harley and hitting the open road. Maybe it's the sense of freedom, or simply a desire to be like Peter Fonda in Easy Rider, I don't know, but there's definitely something very American associated with owning and riding a HOG.
Yet despite its incredible brand strength and customer loyalty, the company is struggling to grow sales and earnings. Just last month management was forced to lower its earnings guidance due to sluggish U.S. demand. The company also slashed production for the rest of the year and announced that it would not predict its financials for fiscal year 2009. In response to the disappointing news investors slaughtered HOG, and the stock is now down 28% over the past year.
Investors will learn more about Harley's fate tomorrow morning when the company releases its quarterly earnings numbers. The consensus estimate on Wall Street calls for a gain of $1.06 per share, down 12% from year-ago levels. But don't spend too much time worrying about the earnings number as it's unlikely to be materially different from the recent guidance. Instead investors need to focus on inventories and margins. Persistently high inventories have pressured operating margins over the past year and until the inventory levels start to come down Harley will struggle to deliver the kind of bottom-line growth investors have come to expect.
That's the bad news, now for the good. International sales remain strong, Harley is sitting on a pile of cash, the company generates over $300 million in free cash flow each year and there's that invaluable brand strength. Could the stock slip another 10% or so? Sure. Consumers are feeling the pinch from the lousy housing market, tight credit and high energy prices so plunking down upwards of $25,000 for a motorcycle -- even a hog -- might not be a priority.
Nevertheless, most of the bad news is already reflected in the stock so long-term investors should use any news related weakness tomorrow as a buying opportunity. Buy near $46, with a 18-month target of $65.
