Harley-Davidson

Harley-Davidson (Ticker: HOG)

Christopher Davis’ funds go for a ride 

Sixty one years ago, about 3,000 motorcyclists broke the peace of a tiny town lying between San Francisco and the San Joaquin Valley. Over the July 4 weekend, they roared up and down San Benito Street and in and out of Johnny’s Bar. Led by a band of hellions calling themselves the “Booze Fighters”, they had come to watch a motorbike competition at the Veterans’ Memorial Park, and they stayed to drink beer and explosively enjoy themselves.

Over three days, Hollister’s handful of policemen lost control and the bikers cruised as they pleased. Alcohol was consumed by the gallon, the town center became a dragstrip, and female pillion-riders shed their clothes. Six years later, in 1953, Stanley Kramer guaranteed the weekend’s infamy by recalling it in his movie “The Wild One”, starring Marlon Brando in his first lead role. At one point “Johnny” is asked what exactly he is rebelling against. “What’ve you got?” Mr. Brando sneers back.

Sixty one years on, time has changed the town’s feelings about motorcyclists, and the bikers themselves have changed just as much. With new Harley-Davidsons – the only acceptable bike for true aficionados – beginning at about $15,000 for no-frills models, the owners are not likely to ride them into bars or practice slalom runs through rows of parking meters. The rebels of 1947 were mostly demobbed soldiers looking for thrills. Many of today’s motorcycling hordes are doctors, lawyers, dentists and architects.   

Wall Street, which was early to spot the potential for $6.20 billion (market cap) Harley-Davidson (Ticker: HOG), has recently worried that the wheels might come off early with the motorcycle-maker, though Christopher Davis’ New York Venture Fund and Davis Selected Advisors remain big holders of the stock. As house prices cracked, pessimism abounded about a product that is essentially a luxury good for upper-middle class, middle-aged American men – one costing as much as an entry-level luxury car. Quarterly earnings confirmed the trend. Revenues sank nearly 8% versus 12 months ago and earnings per share fell by one third. Last year was the first time sales declined since Harley went public in 1986.

But with its share price down by two-thirds since the beginning of 2007 – the lowest level in nearly a decade – concerns about Harley’s future seem overdone. At eight times prospective earnings, the price no longer extrapolates the pace of growth that saw unit sales double and revenues triple over the past decade. An admirable focus on profitability and a firm grip on inventory also are cause for optimism. Harley’s financing arm is a source of mild concern but the manufacturing business is far healthier than those of four-wheeled vehicles in Detroit. If there were a need to conserve cash, annualized dividends and buybacks combined amount to about $475 million, or about half of last year’s net income. Lost market share this year to Japanese manufacturers such as Honda says more about high gas prices than customer loyalty.

Since the early 1980s, when its bikes were referred to pejoratively as “Hardly Ableson”, the brand’s value has risen steadily. The only problem is that loyal buyers are no longer rebels without a cause. Typically males in their late 40s, with half having owned a Harley before, they are being slowly augmented by international buyers. The recession will hurt but this 105-year-old American icon is selling for a bargain and still has plenty of road ahead.