Is It Time To Ditch Harley?

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Harley-Davidson (NYSE: HOG) has been around for 110 years. Over that time, the company has seen its share of ups and downs, but the good times have significantly outweighed the bad times recently. Many investors feel as though the biggest concern at the moment is whether or not Harley-Davidson will be capable of dealing with an aging customer base. We can look at one important clue to see if the company’s customer base really is aging. Even if the results are good (not saying they are), there might be a bigger threat.

A winding road

Harley-Davidson’s target market has been middle-aged white males for decades. And this was the best market to target over the past several decades thanks to baby boomers’ discretionary income. Harley-Davidson catered to those with a rebellious nature, or to those who at least wanted to feel like a rebel on the weekends, and this branding went a long way.

Branding wizardry combined with high-quality products allowed Harley-Davidson to price high. This, in turn, led to strong revenue growth and consistent stock appreciation. However, the landscape has changed from flat and smooth to rocky and winding.

Harley-Davidson states that its outreach program targeting women and minorities has been a success, but some analysts feel the average Harley-Davidson customer is aging. Instead of going through all the quotes and drama, where there’s no telling what’s fact and what’s fiction, let’s simply look at the highest online interest level in regards to age demographics.

According to Alexa.com, the most overrepresented age group visiting Harley-Davidson.com is 55-64 year olds, followed by 45-54, and then 35-44. The 18-34 age demographic is significantly underrepresented. Therefore, the average Harley-Davidson customer is likely aging. On the other hand, this doesn’t mean Harley-Davidson is failing with its outreach program. Its V-Rod -- targeting young male riders looking for performance -- has been well-received. And the 883 Low -- targeting women -- has enjoyed a similar reaction.

Considering Harley-Davidson’s strong marketing record and top-tier quality, it should only be a matter of time before the average customer age lowers. Quality always eventually rises to the top. And it’s not that Harley-Davidson is suffering at the moment -- it currently owns 50% market share of the motorcycle market in the United States.

A bigger concern

Harley-Davidson’s revenue has consistently improved over the past three years, but unlike most companies throughout the broader market, revenue still hasn’t reached the 2008 level. This tells us that while growth has improved over the past several years, that’s only because the decline from 2008 to 2009 was severe. Harley-Davidson even reported a loss in 2009. Earnings have consistently improved since then, but once again, that’s only because the decline was so steep from 2008 to 2009.

Harley-Davidson saved $280 million in 2012 thanks to its restructuring plan, and it expects to save $305 million this year, as well as $320 million in 2014. This might help drive earnings higher, but for long-term results, there must be increased demand. The only way that will happen is if Harley-Davidson drives increased interest from younger consumers, and if the consumer is healthy. The latter is more of a concern since consumers must pay a premium for a Harley-Davidson bike.

Other recreational vehicle investment options

Polaris (NYSE: PII) also sells motorcycles -- Victory and Indian. Additionally, it sells off-road vehicles, snowmobiles, electric vehicles, commercial and government vehicles, as well as accessories and apparel. This broader diversification has led to steadier results. Revenue and earnings have consistently improved over the past three years, and Polaris remained profitable during the difficult years of 2008 and 2009. Considering recreational vehicles are a want as opposed to a need, this is a testament to strong management.

Currently, Polaris demonstrates efficiency and quality debt management, sporting a respectable profit margin of 9.87% and a debt-to-equity ratio of 0.15. The latter is well below the industry average of 1.3. Furthermore, Polaris currently yields 1.70%, compared to Harley-Davidson’s 1.50%.

Winnebago (NYSE: WGO) suffered the most of these three companies during the financial crisis, with revenue and earnings seeing remarkable declines from 2008 to 2009. However, an insider bought a “moderate” amount of stock this April between $17.50 and $17.99. The stock is now trading at $24.57. This insider still hasn’t sold any shares since that time. While a $70,980 investment might not sound like a big deal to some people, it might be a significant amount of money for this insider. It’s not likely that a Winnebago insider would risk that kind of money unless he was confident about the company’s future prospects. That said, Winnebago is highly sensitive to stock market corrections, making it high risk.

Conclusion

Investing in Harley-Davidson might sound like fun, and it’s likely to eventually lead to positive returns, but there would be little sense investing in Harley-Davidson when a more consistent and diversified investment option is available in the same space -- that being Polaris. However, neither of these stocks is resilient to broad market corrections, so proceed with caution.  

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Polaris Industries. The Motley Fool owns shares of Winnebago Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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