Harley-Davidson Gears Up for the Long Haul

Few American companies can boast the longevity of iconic motorcycle maker Harley-Davidson (NYSE: HOG). This year, the company is celebrating the 110th anniversary of the very first Harley, which was built by William S. Harley and Arthur Davidson in a 10-by-15-foot workshop in Milwaukee, Wisconsin.

That first bike was a far cry from today’s chrome behemoths. Literally a bicycle with a simple combustion engine attached, it was designed more with racing than cruising in mind. However, it did establish the company’s reputation for reliability: ten years later, the plucky little Harley was still going, having clocked 100,000 miles with the engine running on its original bearings.

During World War I, the U.S. military bought almost half of the company’s motorcycles, and in 1925, they started to resemble today’s cruisers, when the distinctive teardrop-shaped fuel tank, now a staple on Harley-Davidson’s designs, was introduced.

Harley-Davidson Hits a Pothole

As we wrote when we last covered the company in a September 2012 Investing Daily article, Harley-Davidson is going all out to celebrate the bike’s birthday. In June, thousands of Harley riders from around the world descended on the Vatican for a “blessing of the bikes.” During the event, Pope Francis blessed the group, which had gathered in St. Peter’s Square, while standing in his white papal jeep. The rumbling Harleys nearly drowned out the Latin recitation of the “Our Father” prayer.

Customer loyalty is another of Harley-Davidson’s main strengths: owners consider owning a Harley more of a lifestyle than a purchase. With their head-to-toe leather, they’re easy to pick out in a crowd. But that doesn’t necessarily translate into stock-market steadiness: Harley-Davidson shares are more volatile than the overall market, with a beta rating of 1.18 (stocks with ratings above 1 are more volatile than the market, ratings below 1 are steadier).

That’s mainly because Harley-Davidson motorcycles are in many ways the ultimate discretionary purchase: when hard times hit, motorcycle-buying plans are among the first things to get shelved—even for a company with devotees as serious as Harley-Davidson’s.

The shares slumped badly during the financial crisis, from $42.80 on September 19, 2008, to a low of just $8.33 on March 6, 2009. Sales plunged from $5.97 billion in 2008 to $4.78 billion in 2009. Per-share earnings fell from $2.79 in 2008 to a loss of $0.24 the next year.

Restructuring Put Harley on the Road Back

However, results have been steadily improving ever since, with sales recovering to $5.58 billion in 2012 and earnings increasing to $2.72 a share. That’s a reflection of both recovering sales and Harley-Davidson’s $500-million restructuring plan, which involved cutting jobs and streamlining its manufacturing processes. The company also hired an outsider, Keith Wandell, former president and COO of Johnson Controls (NYSE: JCI), as its new CEO effective May 1, 2009.

Harley shares now trade at around $57.98, up over 40% in the past year. That price amounts to 18.6 times the $3.12 a share that Harley earned in the past 12 months. The average analyst estimate pegs the company’s 2013 earnings at $3.29 a share; the stock trades at 17.6 times that forecast.

In the second quarter, results for which Harley reported on July 25, its sales rose 4.0% from a year earlier, to $1.63 billion. Net income came in at $271.7 million, or $1.21 a share, up from $247.3 million, or $1.07. That beat the Street’s expectation of $1.18 a share in profits. Revenue matched the consensus forecast.

In all, dealers sold 90,193 Harleys in the quarter, up 5.2% from 85,714 a year ago. Sales rose 4.4% in North America, which accounted for 70.2% of total unit sales; 0.98% in the Europe, the Middle East and Africa (18.4% of unit sales); 12.3% in the Asia-Pacific (8.0%); and 39.2% in Latin America (3.4%).

Earnings were also helped by Harley’s decision to scale back, as opposed to close, a wheel-manufacturing operation in Australia. That let the company reverse $5 million it had previously set aside for costs related to the closure. In all, the move will lower its restructuring costs by $10 million in 2013. Gross margin also widened to 36.9% in the second quarter, compared to 35.9% a year ago.

The company continues to forecast that it will ship 259,000 to 264,000 bikes on the year, up from 247,625 in 2012. Harley ended the quarter with cash and marketable securities of $1.4 billion on its balance sheet, along with $4.2 billion of long-term debt.

Female, Minority Riders Wanted

Concerns that the company’s core customer—middle aged white males—is aging have long hovered over the stock. In response, the company has been working on boosting sales to other groups. For example, Harley-Davidson holds frequent Garage Party evenings, which are aimed at teaching women the basics of motorcycling.

Harley feels these moves have been successful: it claims that sales of motorcycles to what it calls “outreach” customers in the U.S.—including young adults, African-American and Hispanic riders—grew at twice the rate of sales to its core customers in 2012. As well, according to data from auto research firm RL Polk, Harley now holds the biggest slice of four markets beyond its core ridership: motorcycle buyers aged 18 to 34, women, African-Americans and Hispanics.

There are differing schools of thought on what impact these moves are having on the age of the average Harley rider: according to UBS analyst Robin Farley, that figure is currently around 50 years old, up from 48 in 2008. The company no longer releases the average age of its riders, though marketing director Mark-Hans Richer recently said the age of the company’s average customer is 47—or born in 1965, one year past what’s considered the end of the baby boom era—and holding steady.

Either way, Morningstar analyst Jamie Katz points to the growth in sales to outreach customers as a big plus. She feels these riders now account for about a third of Harley-Davidson’s domestic clientele. “It’s really made me rethink the potential of the business,” she told Reuters.