Why Can't Harley Zoom?
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What a great couple of days for news photographers on the campaign trail. Photos of Vice President Joe Biden nuzzling with a biker mama at a diner in Ohio and then President Barack Obama bear hugged off his feet by a Republican, no less at a pizzeria have gone viral. The White House News Photographer Association will have some interesting competition this year in the Presidential photo category.
The photo of Biden got me thinking about Harley-Davidson. (NYSE: HOG) I had planned to put it in my Good Ole Boy portfolio but picked some other names instead. It was riding higher back then and had almost revved up to its 2008 share price but has pulled back after its Q2 earnings.
Possibly that was due to unrealistic analyst expectations from Harley–Davidson because of good numbers reported from Polaris Industries (NYSE: PII) and its rival Arctic Cat (NASDAQ: ACAT). Harley-Davidson has a P/E of 14.72 and a yield of 1.40%, not exactly as thrilling as riding on a Harley.
Why Can’t Harley Zoom
Harley-Davidson has some good things going for it besides the fervent loyalty of its customers and its iconic name recognition. The trouble is that a Harley is such a discretionary and aspirational purchase. For those who are merely seeking a mode of transportation like younger males in their 20’s and early 30’s, a demographic ‘devoutly to be wished ’, as Shakespeare would say, a Harley is a major purchase. Harley-Davidson has been trying to capture this group but practically, the true cost of ownership between a motorcycle and a car or truck is dependent on so many variables; maintenance of certain motorcycles is much higher than others, the initial cost of lessons, protective gear, weather gear, licensing can be daunting and there’s also resale value, initial price, financing and more. To compare the costs of ownership you would have to do a model by model comparison between each car and motorcycle permutation.
When gas prices were higher Harley-Davidson was expected to be a beneficiary but that is only one factor that buyers consider. Some web sites suggest it’s no cheaper gas-wise than fueling up a Prius. Then when consumer spending rose it was thought again that Harley-Davidson would benefit and it did, just not as much as analysts expected.
The fact is that Harley owners are older, more educated and richer than other motorcycle owners. While that helps its image as an aspirational brand it doesn’t seem to help its image with the younger males it seeks. For years, the million member Harley Owners Group has been striving to dispel a lingering image of Harley riders as outlaws and lowlifes. Could it be they did their job a little too well?
Women riders are another demographic that Harley-Davidson would like to attract. Motorcycle ridership is up for women overall. Harley-Davidson has an entire section of its website devoted to women riders with mentoring opportunities, classes, true stories and a Harley-Davidson pink accessories line to help fund breast cancer research. (Don’t worry, biker mamas, the clothes and accessories are fashionably black with just touches of pink.)
Harley-Davidson, the stock, has been hovering between being a big cap over $10 billion and a mid-cap below $10 billion and this is another reason why the share price has had trouble. Big cap funds don’t want something that can’t hold a big market cap valuation reliably.
Short interest has grown over the last month from 7.49 million to 8.16 million shares held short. Dubious short sellers may have cold comfort here as the stock has actually outperformed the S&P 500 by 3.50% over the last year. It should have more upside as it’s still down around 15% from its 52 week high. Also, Harley-Davidson has been cutting its workforce and retooling some of their manufacturing facilities to improve efficiencies.
What About Polaris
Polaris has outperformed Harley Davidson; up by 49.29% more than double the S&P 500 over 52 weeks and is just a few percentage points off its all time high. Polaris has a slightly higher yield of 1.90% but a higher P/E of 22.01. The company makes snowmobiles, off-road vehicles and motorcycles. Although it is considered a consumer discretionary cyclical they also make winches, blowers, plows, pull behinds and other equipment that add to the utility of their ATV’s and side by side vehicles.
Based on the share price performance and some fundamentals Polaris may be a buy if it has a pullback but it’s awfully close to that ‘too far too fast’ tipping point. Short interest is down in Polaris and their debt ratio is 1.55, just a tad higher than the outer limit recommended by Motley Fool principles of 1.50.
Jumping the Snowbank
It’s worth noting that Polaris has several competitors in the ATV game like John Deere and the aforementioned Arctic Cat. Arctic Cat, another manufacturer of snowmobiles and all-terrain vehicles, has no yield and is much smaller by market cap than the other two. This name has really jumped the snowbank soaring from a low of $13.46 to a high of $47.46. On September 10 it rose yet another 3.5%.
The company reported on July 26 a 49% rise in revenues. Over two years of earnings beats has investors breathing the thin air looking down at the competing stocks below. It has come back from negative earnings from a year ago to a $2.0 million profit. Quite a turnaround for the little Minnesota company.
A Midwestern Showdown
So it comes down to who to root for, iconic American company Harley-Davidson founded in 1903, based in Milwaukee or upstarts from Minnesota, Polaris and Arctic Cat, founded in the 1980’s. Polaris and Harley-Davidson are reporting again on October 15 and Arctic Cat again on October 23.
Frankly, I’m hoping Harley-Davidson can capture those young men it needs and work down its debt to zoom past Polaris and Arctic Cat. One of my fondest memories is riding on the back of a Harley with a very handsome boyfriend in my single days. Sigh..You know who I’m rooting for.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Arctic Cat. Motley Fool newsletter services recommend Polaris 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.If you have questions about this post or the Fool’s blog network, click here for information.