Archive for September 2010

Is Harley cruising for a bruising?

September 27, 2010

In 2009, Harley-Davidson embarked on an aggressive restructuring plan to avoid bankruptcy and retain investors: It shed Buell and MV Augusta; shut down factories; sold off machinery; reneged on promises to develop land and add jobs in a quid pro quo deal involving the museum; cut 2,000 jobs; forced the workers to pay more of their health insurance costs; and turned union jobs into fairly low-paid temp jobs.

The Motor Company’s threat to pull manufacturing from Wisconsin resulted in 25 million in tax credits even as the company throws hundreds onto the unemployment rolls—benefits that come out of taxpayer dollars.

Even though the Motor Company admitted enormous restructuring costs, it presented the 2Q results in an extremely favorable light—look, despite everything, the company rebounded from enormous losses and made a little profit.  And it’s leaner—and meaner—coming out of it.

Some analysts, though, question whether it’s a sound health and if the company will rebound in the future. Some are even recommending short selling the stock:

Seth Jackson, in a Motley Fool article, “Show Me the Money, Harley-Davidson” published after the second quarter results came out found the cash flow was disturbing: “When I say “questionable cash flow sources,” I mean line items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That’s not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, I feel obliged to crack open the filings and dig even deeper, to make sure I’m in touch with its true cash profitability.”

Questionable cash sources, he points out, comprises 28% of the cash flow from operations for Harley-Davidson. “Harley has one of the messier cash flow statements out there, full of swings from “retained securitization interests” and other wonders of modern finance.”

In comparison, H-D’s nearest competitors FCF range from 13% (Polaris) to a negative 8% for BMW group. Iow, H-D’s FCF is over twice as much, which isn’t necessarily bad but it’s not necessarily good.

Then there’s the kind of savings that come from restructuring. The Motor Company says it “saved” $135 million to $155 million from the restructuring activities it’s undertaken beginning in 2009. Harley wants us to believe savings could go up to $240 million to $260 million a year.

Jeffery B. Middleswart, President and Director of Research at Behind The Numbers, says restructuring charges tell him a company made a mistake, especially when they come up often.

“They are telling you they screwed something up,” he said.

While huge savings in one year look impressive on a balance sheet, they generally aren’t duplicated again. There’s only so many times they can  borrow $600 million from investors, disassemble plants or throw hundreds into unemployment to look good for Wall Street mavens.

More to the point, Harley’s 2Q profit didn’t come from selling motorcycles—it came from selling off assets, laying off workers and borrowed money—specifically, it came from cleaning up some of the mess in the Financial Services subsidiary. The business of HDFS is primarily motorcycle loans. Making loans is not making motorcycles.

Ultimately, though, a motorcycle manufacturer has to sell bikes if it’s to stay in business. And they aren’t selling many—and the less motorcycles it makes, the less loans.

And such drastic measures surely convey that Harley-Davidson doesn’t believe it will be needing those factories or workers for a long time. And that speaks volumes about the kind of company H-D believes it will be in the future—one that won’t be selling a lot of motorcycles soon.

It’s also going to have $5 billion in net debt after the loans and restructuring costs.

It will take a lot of savings from restructuring and a hell of a lot of bikes sold to pay that back.

Another spot of concern is the increase in short selling of Harley stock. As another Motley Fool article, “Don’t Short These Stocks” by Jordan DiPietro pointed out that “droves” of investors are shorting Harley stock.

Short Selling is the act of borrowing stock to sell with the expectation of price dropping and the intent of buying the stock back to replace at a cheaper price.”

Short interest as a percentage of float, which is a great yardstick for how heavily shorted a stock actually is, typically remains below 5% — anything above that usually indicates a red flag.”

Harley’s short interest percentage of float was 10.7%–or twice what’s considered typical.

Iow, many investors believe Harley isn’t on the road to recovery for many of the reasons we’ve discussed—an aging demographic that’s uncertain about the security of their investments and pensions or are unemployed, massive net debt, questionable cash flow and a profit that came from financing bikes rather than making them.

Beyond all we’ve already talked about, there’s an odd little coincidence that suggests they might be right:

According to an article on the website Seeking Alpha, “Harley-Davidson: Looking for a Good Short? Shed Some Fat”,

The financial services company, BMO Capital Markets, (http://www.bmocm.com/) found that S& P’s Case-Shiller index of house prices correlated with Harley’s stock prices than any other measure such as “the unemployment rate, interest rates, gross domestic product and consumer sentiment scores…to explain the stock’s movements.”

Both existing and new home sales plummeted in July—but home prices were increasing slightly. Still, “While the numbers are upbeat, other more recent data on home sales and mortgages point to fewer gains ahead,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s.”

Existing home sales rose slightly in August, but were still down not only from June but from August 2009. New home sales were static from July. Case-Shiller results will be announced this coming week.

Harley stock price rose slightly after the unions caved in Wisconsin—this strengthens the correlation with Case-Shiller house prices though one has nothing to do with the other.

However, home sales—either new or existing—speaks of a widespread economic health. And if people can afford to buy a house, they might afford an over-priced motorcycle. It could be that  home sales are bellwether of motorcycle sales, it’s very likely that Harley shipments were soft in the third quarter. We’ll find out on October 19 when the Motor Company releases its third quarter results.

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How healthy is Harley-Davidson as the end of the 3rd quarter approaches?

September 20, 2010

Many stock market analysts believe motorcycles are a sign of consumer confidence. If that belief is true, then the economy is slightly improving:

Harley’s second quarter shipments were slightly up from first quarter 2010, and, as Harley announced in its 2Q earning report, at the end of the 2Q income was 71.2 million compared to 19.8 million at the same point last year. It seems things are looking up in the Beer and Bike city and thus for the nation.

And, despite all this, more analysts say hold—even sell—than buy. So why aren’t they all woo, woo, go Harley? Let’s look deeper at Harley’s self-proclaimed road to renewing health:

Shipments up but not over 2009

Harley counts a shipment as a sale—that means the motorcycle is sold to the dealer. It doesn’t mean it’s sold to the consumer. It also cut shipments back severely over 2009 and lowered inventory.

Harley’s Stock Price and Shipments at the end of the 2 quarter for each year:

In its second quarter report, Harley announced shipments were down 8.4% from the same quarter in 2009. Of course, that was in the throes of the Great Recession and an abysmal year for the Motor Company. If shipments are still down from that, it’s not

H-D would have to meet their goal of selling 53,000-58,000 motorcycles in the 3Q in order to hit their goal of shipping 201,000–212,000 motorcycles by the end of 2010. That’s still 5%–10% down from 2009, which was significantly lower than 2008.

The growth in shipments over 1Q is good—but distracts from the real picture: shipments are worse than at the height of the Great Recession.

Dealer sales are down A report commissioned by analysts show that 66% of the dealers surveyed at the end of the second quarter said their sales fell by 20% in the 2Q.

If product is choking showroom floors and dealers are choking on the interest payments from that unsold stock, third quarter orders are likely to be lower especially since there’s nothing particularly new or exciting in the 2011 models to driver consumers to buy. This makes it harder for Harley to make their shipment goal.

According to Matt Andrejczak in a July 30, 2010 MarketWatch article, “How short-selling sleuths spot accounting gimmicks on financial reports”,“Typically, inventories should rise at about the same pace as sales. If a company’s inventories are growing faster than sales or expected sales growth, it’s a clue that products aren’t moving. In that case, gross margins could get squeezed.”

Harley is aware of that—and set what TPTB thought were modest shipment goals. Dealers, clearly, thought they could sell what they bought but were wrong and inventories have grown, in many cases faster than sales.

Needless to say, paring shipments further is likely to end in more layoffs, which doesn’t help the nation’s recovery (or the workers, obviously).

But high unemployment is a major reason why dealer sales are down—H-D’s core demographic has been hit hard by both job loss and uncertainty that their savings and investments are secure. And Harleys are high-end discretionary products.

Until Harley’s base is securely employed, sales will continue to lag. But the slower the recovery goes, the slower sales and the slower Harley recovers. Hello, vicious circle. And this is true of a great many companies and entities in the USA that are busy cutting benefits and wages: they feed into the very process that undermines their future profitability.

Dealers have unhappy choices to deal with their inventory: They can—and would—cut orders for new product, which exacerbates the problems H-D already faces. They can cut prices, which also cuts into gross margin profits. It could also damage the brand—it’s no longer a prestige product if it’s on the sale rack.

Market saturation Harley’s problems are exacerbated by market saturation (both here and in Canada). More and more analysts are realizing the Motor Company’s inability to attract women, minorities and younger men and caution that it will affect the corporation’s recovery. Nor is Harley making significant inroads in other countries.

These domestic and international failures are the result of the same branding that made the company such a success. It’s an image that’s dated, narrow and even a joke among the very people the company needs to attract. Moreso, the essential elements of motorcycling—individuality, daring, independence—have been successfully incorporated by Harley’s competitors in their sport, tourer, adventure models in ways that appeal to the very groups Harley has been unable to attract.

Bottom line: when times were good, the leadership failed to find a creative way to translate the brand for a new generation and new concerns. It dwelt in the past even as it aggressively pursued questionable business practices (such as the subprime loan fiasco). Unless a marketing miracle occurs, Harley’s market share will continue to shrink.

This suggests that, unless something dramatically positive happens in the economy in the next few weeks, both sales to consumers and shipments to dealers will be down in the 3Q. And that would mean that Harley may not make its already depressed and modest shipment goal this year. And that does not bode well for the Motor Company.

Both sluggish sales and market saturation affects the other two main streams of revenues: Motorclothes/accessories and Harley-Davidson Financial Services. How it affects the first, the Motorclothes division, is obvious—the second deserves a bit of explanation.

Harley-Davidson Financial Services At the height of the recession almost 30% of Harley’s Financial Services loans were subprime and the Financial Services subsidiary lost about 60 million. This is where the 600 million dollar loan from Buffet and Davis Selected Advisers, L.P. went. A change in the subprime loan policy, the restructuring and infusion of cash has made the subsidiary profitable in the 2Q. For now. And, of course, since Harley loans the dealers money to buy its motorcycles Harley makes money from the interest on shipments dealers paid for but can’t sell.

The bottom line is: Demand for loans is contingent on demand for bikes and it’s going to be years before Harley gets back to even 2007 shipments.  HDFS’ recovery looks good on paper but under the surface lurks the hefty 15% interest on that 600 million loan that and the debt itself that is due in just three years.

Ultimately though, a motorcycle manufacturer has to sell motorcycles to be successful or even to stay in business. It’s still behind

As “Harley-Davidson: Easy Riding on Less Bad Results” published on July 20, 2010, stated,  “At Ockham, we would not recommend buying Harley’s stock following today’s earnings report because “less bad” just is not good enough.”

In the next entry we’ll look at some troubling signs some analysts have found when they looked behind the numbers of the 2Q report. And what they worried about in July is likely to be even more true as the end of the 3Q approaches.

Harley-Davidson plays hardball in Wisconsin: capitulate or we leave

September 13, 2010

No matter what marque a motorcyclist rides if they hear “Milwaukee, Wisconsin”, “Harley-Davidson” is the first thing comes to mind (or right behind beer). But now, barely two years after opening its self-referential museum in Milwaukee, Harley is threatening to move its manufacturing out of state.

It’s already shut the plant in Wauwatosa—and, of course, the Buell operations in East Troy closed down earlier this year. But Harley’s not doing well (more on that in the next entry) and desperate times call for desperate measures.

According to company spokesperson, Bob Klein, the Motor Company would rather stay there but is looking at other locations. Kansas City—who hoped to benefit from the troubles in York a few years ago—hopes to benefit from the Dairy state turning sour for Harley.

It all depends on the unions, according to Harley. All the workers have to do is agree to freeze their pay, cut hundreds of jobs, turn hundreds more into non-union jobs—many of which would be temporary jobs with no benefits. The three unions have encouraged their workers to accept the bad deal to keep the Motor Company in the state.

While Harley’s threat may sound drastic, a little history is in order to see this threat in its proper perspective:

In 2005, Harley-Davidson paid 1.5% of pre-tax profits in Wisconsin income tax resulting in almost $23 million in state taxes. In a series of political maneuvers and tacit threats to leave and promises to stay, employ and grow, H-D (and other big corporations) won tax rate breaks that had the Motor Company paying a mere $1 million in 2008 or less than 0.1% of profits.

In 2006, when Harley was riding high on the HOG, the Motor Company threatened to move manufacturing out of state unless the Wisconsin unions agreed to drastic cuts in wages and benefits. And, after some empty saber rattling, the union capitulated.

In 2007, union workers in Pennsylvania went on strike for two weeks before basically capitulating to Harley’s contract that lowered wages and benefits.

During these same years when its revenue soared and state taxes plummeted and unions rolled over, Harley also received not just federal credit for research and development but a Wisconsin state Transportation Economic Assistance grant of over a quarter of a million dollars to the Harley plant in Tomahawk, WI. According to a case study by the Federal Highway Administration

“The goal of the TEA Program is to attract and retain non-speculative business firms and create or retain jobs in the State.”

Iow, Harley took a quarter of a million of taxpayer dollars to create or retain jobs in Tomahawk in 2009 and plans to not only cut them in 2010 but move out of state.

In 2009, the Motor Company cut 370 union jobs and about 300 administrative jobs with most occurring at the facility in Springettsbury Twp in York County, PA.

Early in 2009, Harley announced it was laying off 12% of its workforce amounting to 1,100 jobs. Later in 2009, Harley threatened to build a new plant in Shelbyville, Ky and close the plant in York—and in November, 2009 the union in Pennsylvania agreed to cut jobs and benefits to keep the plant open—and the state of Pennsylvania gave the Motor Company around $15 million to stay in the state.  Though Shelbyville lost that time, it is coyly silent on whether it’s in the running for the Wisconsin operations this time.

Back at corporate headquarters—still in 2009, Harley Corporate complained bitterly that they had to pay 22.5 million in bookkeeping charges to determine how much the company would owe in the future because Wisconsin closed a corporate tax loophole. Iow, they complained about paying less than they used to for an entire year. For more on this, read here:

Oh, it seemed justified in 2009—Harley suffered in the Great Recession with plummeting motorcycle sales and egregious problems with credit defaults and the inability to securitize those consumer loans. Altogether the Motor Company lost $55 million.

But it’s an ill wind that blows no good and Harley used the recession to do some massive house-cleaning:  Buying the MV Augusta—who had gone through several owners all unable to make the company profitable was one of the most colossally stupid corporate decisions it had made in decades. The recession gave a easy reason to sell it.

Somehow it attracted the interest and investment of the legendary Warren Buffet—and, of course, it used the Great Recession to strongarm Pennsylvania with the very same threat it is now using in Wisconsin. Hey, if it worked once, why not do it again.

By the time the lay-offs are done, the full-time permanent workforce York, PA will have been cut by more than half from 1,950 to 700-800 employees. Not to mention the huge cuts in the labor force elsewhere—and upcoming in Wisconsin if the workers accept the over-the-barrel deal the Motor Company offers.

But every cloud has a silver lining—Pennsylvania hopes that if Harley shuts its factories in Wisconsin and moves the work to Kansas City that some of the work done now in KC will move to York—making that $15 million investment and the sacrifices of the York unions worthwhile.

Of course that’s what Wisconsin thought when it gave Harley the TEA grant and those unions took a haircut years ago. Now Harley wants the workers to shave their heads. And, if the union workers bend over again tomorrow to keep Harley there—well…just how long do you think it will be before Harley is threatening again.

Which is a word to the wise in KC—when their union negotiations come up, how much do you want to bet that Harley threatens to move out of Missouri to Wisconsin and/or Pennsylvania or Kentucky or somewhere else unless those unions, too, accept Harley’s terms?

Of course, Harley—though shipments are down almost 26% over 2008—had made a profit at the end of the second quarter (more on this tomorrow) even though shipments are only marginally up over the same quarter a year ago.

Iow, workers’ sacrifices will pave the way to Harley not just surviving the recession but doing so profitably. (Of course, we don’t know what the 3 and 4 quarter results will be).

And before you give me any “unions are the curse of America” argument or the recession argument consider this: According to a op-ed piece, “Are Harley cuts a case of need or greed?” by Jack Norman published in the Milwaukee Journal-Sentinel yesterday, draconic cost-cutting is limited to the worker:

In 2009 when the USA was in the worst recession since the Great Depression and motorcycle sales had plummeted, the CEO salary (split between Zeimer and Wendell in 2009) was $1,105,169 with another $8,864,919 in extras.

External board members (not already on Harley’s payroll) collected $80,000 fee in 2009, plus $50,000 worth of stock. And things aren’t so bad at Harley that board members gave up their $1,500 annual allowance for clothes and accessories.

This at the same time as thousands (at the least) of their core demographic struggled to make their make their monthly payments or had to sell their bikes or had them repossessed. And more than 3,000 workers will have lost their jobs in the past two years.

But, hey, that’s the Great American Way, right? Except Harley has taken tens of millions from taxpayers—much of it based on promises to create or retain jobs.

In fact, Harley’s hand is always out either begging for bucks from taxpayers or strong-arming the American worker….it’s such a great example of the American free market, isn’t it?

The American worker who has been Harley’s base and yet, because of corporate shenanigans like Harley’s or Wall Streets have lost their jobs or forced to accept equally bad deals to keep a job while the CEOS suffer not at all. Really, does it deserve its fans that bleed black and orange?