Harley Davidson, Inc. (HOG, Financial) has had as tough a year as any stock, down 73% over the last 12 months and reaching its 52-week low this morning. The company reported 4Q EPS of $.34, well below consensus estimates of $.57. For the full year, earnings were down 25.4% to $2.79 per share, missing even the most bearish estimates of $2.97. Harley Davidson Financial Services was a major source of problems as that unit swung to an operating loss of $24.9 million in the fourth quarter, with exposure to securitized loans continuing to be a problem.Â
We detailed Harley’s precarious position in December(Not So High on the HOG), and warned that the $6.3 million in write-downs in the third quarter had the potential to get worse, which seems to have been an understatement. Write-downs in the fourth quarter totaled $63.5 million, with a $35.1 million write-down of existing securitization interests and a $28.4 million write-down to fair value of finance receivables held for sale.
With the financial services unit in deep trouble and its chief having recently been ousted, it is commendable that the company was able to turn a profit. According to the quarterly report, HDFS has $1.5 billion in net cash flow needs and has already begun to take advantage of the Fed’s commercial paper lending facility. Obviously, the results of HDFS severely impacted the company’s overall performance. Not helping matters, motorcycle sales in the U.S. were down by 19.6%. Interestingly, international sales showed a slight up-tick in the quarter. Revenue for the quarter was $1.29 billion, which was a decline of 6.8% but was in-line with guidance. Interestingly, Harley is planning to boost first quarter shipments to between 74,000 - 78,000, an increase of 3%-8%. That short-term optimism is quickly negated by full year 2009 shipping estimates of between 264,000 - 273,000, an overall decrease of 10% to 13% from the slumping sales of 2008. Clearly, Harley Davidson management sees a rough road ahead in 2009.
As a further sign of belt-tightening at Harley, the company is cutting some 1,100 jobs, or 12% of its workforce. In addition, HOG will slow production at its facilities; in some cases consolidating plants and in others farming out work to third parties. Management’s pessimistic view of the year ahead is echoed by Standard & Poor’s, which last week downgraded Harley’s debt to BBB+ from A. A spokesmen for S&P, Andy Lui stated,
“With consumer sentiment getting weaker and the U.S. economy losing more jobs in 2009, we believe that the company’s results in 2009 will be even weaker than in 2008.” And speaking of Harley’s securitized debt and leverage, “With this market remaining somewhat illiquid and becoming a more expensive source of funding than historically, Harley-Davidson may need to supplement securitization financing with more unsecured debt to help customers purchase its motorcycles, leading to an increase in debt leverage.”
Therefore, while we find the valuation of HOG compelling, it appears that management as well as analysts and ratings agencies agree that the struggles within Harley are far from over. We have rated HOG as Greatly Undervalued because based on historically normal valuations the stock is undeniably cheap. However, just because a stock is cheap compared to historical norms does not necessarily mean this is the right time to buy. Harley faces some serious issues in the year ahead. The only reason to buy HOG right now would be if you believed that both the consumer spending environment will soon improve dramatically and that the credit markets will improve enough to enable the company to trim its exposure to securitized loans. If you believe that these conditions will worsen before all is said and done, then HOG has more down-side ahead.
Ockham Research Staff
www.ockhamresearch.com
We detailed Harley’s precarious position in December(Not So High on the HOG), and warned that the $6.3 million in write-downs in the third quarter had the potential to get worse, which seems to have been an understatement. Write-downs in the fourth quarter totaled $63.5 million, with a $35.1 million write-down of existing securitization interests and a $28.4 million write-down to fair value of finance receivables held for sale.
With the financial services unit in deep trouble and its chief having recently been ousted, it is commendable that the company was able to turn a profit. According to the quarterly report, HDFS has $1.5 billion in net cash flow needs and has already begun to take advantage of the Fed’s commercial paper lending facility. Obviously, the results of HDFS severely impacted the company’s overall performance. Not helping matters, motorcycle sales in the U.S. were down by 19.6%. Interestingly, international sales showed a slight up-tick in the quarter. Revenue for the quarter was $1.29 billion, which was a decline of 6.8% but was in-line with guidance. Interestingly, Harley is planning to boost first quarter shipments to between 74,000 - 78,000, an increase of 3%-8%. That short-term optimism is quickly negated by full year 2009 shipping estimates of between 264,000 - 273,000, an overall decrease of 10% to 13% from the slumping sales of 2008. Clearly, Harley Davidson management sees a rough road ahead in 2009.
As a further sign of belt-tightening at Harley, the company is cutting some 1,100 jobs, or 12% of its workforce. In addition, HOG will slow production at its facilities; in some cases consolidating plants and in others farming out work to third parties. Management’s pessimistic view of the year ahead is echoed by Standard & Poor’s, which last week downgraded Harley’s debt to BBB+ from A. A spokesmen for S&P, Andy Lui stated,
“With consumer sentiment getting weaker and the U.S. economy losing more jobs in 2009, we believe that the company’s results in 2009 will be even weaker than in 2008.” And speaking of Harley’s securitized debt and leverage, “With this market remaining somewhat illiquid and becoming a more expensive source of funding than historically, Harley-Davidson may need to supplement securitization financing with more unsecured debt to help customers purchase its motorcycles, leading to an increase in debt leverage.”
Therefore, while we find the valuation of HOG compelling, it appears that management as well as analysts and ratings agencies agree that the struggles within Harley are far from over. We have rated HOG as Greatly Undervalued because based on historically normal valuations the stock is undeniably cheap. However, just because a stock is cheap compared to historical norms does not necessarily mean this is the right time to buy. Harley faces some serious issues in the year ahead. The only reason to buy HOG right now would be if you believed that both the consumer spending environment will soon improve dramatically and that the credit markets will improve enough to enable the company to trim its exposure to securitized loans. If you believe that these conditions will worsen before all is said and done, then HOG has more down-side ahead.
Ockham Research Staff
www.ockhamresearch.com
