If you jump onto Harley, you’ll arrive ‘late to the party’

Off the Wire
News Harley-Davidson Inc. shares roared and shot forward like one of the company’s famed motorcycles last week when the company reported that first-quarter profits hadn’t fallen as much as expected.

Whenever a big brand-name stock makes headlines with a jump, and looks like it is poised for a solid future, average investors start getting interested. But in a case like Harley-Davidson, the news that popped the stock also took a lot of potential gains off the board, changing the value proposition.

“People who see the news and want to buy Harley-Davidson now are late to the party,” said Brent Wilsey of Wilsey Asset Management in San Diego. “This is a case where maybe you don’t want to make too much of an earnings surprise. Yes, they had some good news . . . but the news here is not all good.”

Harley-Davidson, of course, is the world’s largest manufacturer of heavyweight motorcycles, controlling roughly half of the domestic sales and one-third of the global market. The company has tremendous brand loyalty, and is known as a favorite of investment legend Warren Buffett.

Plenty of investors will follow Buffett into almost any stock, but they should put the brakes on Harley, where Buffett gave the company a $300 million lifeline 14 months ago. The motorcycle maker is locked into paying Buffett’s Berkshire Hathaway an annual interest rate of 15 percent per year. A buyer of Harley stock isn’t getting that kind of sweet deal.

Harley needed the buyout because the company’s finance arm collapsed during the credit crisis of late 2008. When the market bottomed out, Harley stock turned a corner and started to accelerate. Not surprisingly, the valuations were good.

A year later, and the company’s earnings surprise pushes the shares up by about 10 percent. That means the price has doubled in a year. For average investors, looking at a brand-name stock they plan to buy and hold, the purchase point is more important than many investors give it credit for. Plenty of buy-and-holders believe that a week or two worth of price action is no big deal when considering a stock they plan to own for three or more years.

“Price point is always important,” said Mark Coffelt, manager of the Empiric Core Equity Fund. “Even over a three-year holding period, a 10 percent difference implies a 3 percent per year difference, which is the difference between average and great.”

At this price point, Harley looks worse than average.

The company cut its dividend late in 2009, and didn’t add so much as a penny back during the market’s rebound. While first-quarter profits didn’t fall as much as Wall Street expected, year-over-year sales and earnings were off sharply. It’s no surprise, given the Buffett deal, that total debt is climbing, and that the debt-to-equity ratio now stands at 336 percent, a number that should spook the typical buy-and-hold investor.

Harley may be a cult brand, with incredible user loyalty, but heavy bikes are still a niche market, and one that isn’t likely to grow much until economic recovery is far more robust.

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