Manufacturing Profits

Gerelyn 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) is one of those companies that is more than just a business - it's a movement. Riders join together not just for joy rides but to demonstrate their solidarity for certain causes, such as finding cures for cancer and autism, to name a couple.

No doubt witnessing the packs of bikers soaring down the highway in an almost synchronized manner evokes feeling of nostalgia from the oldest of Americans. Harley, after all, is a household name that has been around for more than a century and one - thanks to ongoing and sharp cost-cutting initiatives - has a great chance to be around for a lot longer.  Besides, once riders experience Harley they often become hooked.

Nonetheless, it's no secret that Harley was forced to confront serious issues, such as production inefficiencies and hiring procedures, by launching a restructuring in recent years amid the economic crisis - a financial overhaul that continues today and into 2013. This year alone, Harley is pouring some $50-$60 million into the restructuring, which incidentally is $10 million below previous estimates. In 2012, the motorcycle company expects to save nearly $300 million from the cost-cutting initiatives that began in earnest three years ago.

Most recently, the company's York, PA campus has been downsized from more than three dozen buildings to a sole facility and human beings are being replaced by robots, according to The Wall Street Journal. The new production facility is the handiwork of Keith Wendell, who took the helm at Harley three years ago and noticed glaring inefficiencies at the York plant. He threatened to relocate production to Kentucky but union workers conceded to the company's demands and now York gets to keep Harley. The prize didn't come without a cost, however.

The changes make for a more nimble production hub, one that can respond to changing market conditions and demand in a more seamless fashion. It also calls for a more nimble relationship with its staff.

With the exception of key quality control measures, Harley has automated much of its assembly-line procedures. Its hourly workers at this -- one of Harley's top three facilities by size -- location have been slashed in half from 2009 levels. About one-tenth of the part-time employees are further grouped as casual and work -- well -- when there is work.

If successful, the overhaul could have notable financial benefits. Operating profit margins in Harley's bike business but not including its financing arm could jump about 4 percent in 2012 from just over 12% three years ago, according to Robert Baird analysts cited in the Wall Street Journal. Indeed, some financial analysts peg Harley's profit growth at some 22% for 2012.

Harley's stock is trading about 10 percent higher year-to-date, but still hovers at about 20 percent below its 52-week high. The stock pulled back over the summer months even as Harley launched its new Hard Candy Custom motorcycle line -- bikes that are painted as a throwback to the 1960's and 1970's.

Manufacturing Sector

It's not just Harley as the manufacturing sector broadly speaking is running a tighter ship since the economy softened and in general it is paying off. Profits at U.S. manufacturers were exceeding pre-recession levels at an annualized rate of $363 billion based on data collected from the first quarter and based on government data cited in the Wall Street Journal.

Nonetheless, a soft economy hits the manufacturing sector hard. Tractor maker Caterpillar (NYSE: CAT) is planning for anemic economic growth through 2015, which caused the company to lower profit expectations for that year, according to an analyst meeting held September 24th.  Over the summer, Caterpillar reported a record breaking second quarter, and is gearing up to release third quarter results in about one month. The company also recently lowered its 2012 revenues guidance to a more narrow range of $68-$70 billion down from $68-$72 billion previously estimated amid tough economic conditions. Caterpillar, whose stock is off 22% from its 52-week high, generates sales primarily from construction industries, resource industries and power systems.

Like Harley, tractor maker Caterpillar has a similar flexible worker structure, which represent some 16% of the company's workforce around the world and which is up more than 10% from 2009 levels, according to The Wall Street Journal. Indeed, Caterpillar reported in its second quarter that its flexible workforce increased by some 4,039 workers. This approach saves the company money, as Caterpillar can use more workers during high-demand periods and typically isn't required to pay severance to these workers when there is a slowdown.

Switching gears to aerospace, orders are "growing" at airplane manufacturer The Boeing Company (NYSE: BA), according to Ray Conner, who was recently named Boeing Commercial Airplanes President and CEO and who was speaking at a recent Morgan Stanley conference. The company recently made its maiden North American delivery of its 787 Dreamliner to United Airlines, and has nearly five dozen more of these aircraft on order, according to MarketWatch. In its second quarter, Boeing raised its 2012 top and bottom line performance expectations and the stock is trading about 10% below its 52-week high.

Clearly, Harley Davidson is one microcosm of the totality of machine manufacturing. And it is a company that like Caterpillar and Boeing for that matter is sensitive to changing economic conditions. Whether or not its cost-cutting initiatives pay off has yet to be seen but I would bet there are going to be plenty more model years and sponsored benefit events ahead for this American made brand.


GerelynT has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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