Posted on 04/13/2005 11:55:31 AM PDT by Cagey
NEW YORK (Reuters) - Harley-Davidson Inc. (HDI) on Wednesday cut its 2005 production and earnings targets and blamed bad spring weather for a 1 percent dip in first-quarter U.S. retail sales of its motorcycles, sending shares down 17 percent.
The warning overshadowed news of an 11 percent rise in quarterly earnings, and raised questions among analysts about the long-term growth outlook and strategy for Harley-Davidson.
"Management attributed the cuts to slow first-quarter sales, but we think the issue may run deeper than that," said RBC Capital analyst Ed Aaron. "We think Harley's underlying (production) growth rate is lower than either management or investors perceive."
Harley-Davidson, based in Milwaukee, said it would cut 2005 production by 10,000 shipments from its original forecast, and now targets shipment growth of 3.7 percent from a year ago.
The stock was down $9.99 at $48.78 on the New York Stock Exchange after forging the biggest fall in its history and hitting its lowest level in 15 months.
Chief Financial Officer and CEO Elect Jim Ziemer attributed the shortfall in U.S. retail motorcycle sales to weather and delayed warm spring temperatures and called the cuts a "precautionary measure."
"This action we are taking now to take out 10,000 units ... is a small adjustment to make sure we don't run into having too much carry-over product," Ziemer said in an interview. "It's not a reaction to bikes selling for less than (sticker price) or an economic concern."
Harley-Davidson has traditionally had a greater gap between supply and demand, but it has recently moved to narrow that and change the situation of the past when dealers charged more than sticker price and there were long waits for bikes.
When demand far outstripped supply in the past, small changes in the market did not cause Harley-Davidson to adjust production. But the company is more sensitive now, especially as the model year ends in two-and-a-half months, Ziemer said.
Analysts continued to seek other reasons for the productions cuts, raising questions about dealers' inventory levels and higher credit losses.
US Bancorp Piper Jaffray analyst Tony Gikas, who has a "market-perform" rating on the stock, said his checks with dealers suggested trends had been weakening for eight months.
"There is less confidence in forward bike sales, the level of dealers seeing bikes exceeding expectations is on the decline, and inventories were high," said Gikas. "Management is still overly optimistic on the longer-term opportunity ... and what the story lacked today was strategy."
For the first quarter, net income rose to $227.2 million, or 77 cents a share, from $204.6 million, or 68 cents a share, a year earlier -- topping analysts' estimates by a penny. Revenue climbed 6 percent to $1.24 billion.
During the quarter, annualized credit losses rose slightly above Harley-Davidson's target, due to a higher incidence of losses and lower recovery rates on repossessed bikes.
The company said its U.S. motorcycle retail sales fell short of its expectations, resulting in its decision to limit short-term production growth and cut its earnings growth outlook for the year to about 5 percent to 8 percent, down from its previous forecast of an increase in the mid-teens.
Analysts, on average, expected earnings before items to rise about 12 percent, according to Reuters Estimates.
Harley-Davidson cut its production target to 329,000 units, from its previous target of 339,000. That represented 3.7 percent growth from last year's 317,000 shipments rather than its previous forecast of nearly 7 percent growth. It expects almost all the production cuts to occur in the second quarter.
Ziemer, who said the company will continue to buy back shares, forecast lower second-quarter earnings from a year ago due to inefficiencies and disruptions in production.
Despite the cuts, he stood by the company's long-term unit growth projection of 7 to 9 percent, as well as its outlook for mid-teens earnings growth other than for this year even though it backed away from its 2007 target of 400,000 units.
"We are still seeing increases in demand but we are also seeing greater increases in supply," Gikas said. "I still think there are additional risks to production later this year and certainly to their outlook for 2006 and 2007."
Ted Parrish, a co-portfolio manager of Henssler Equity Fund, sold the fund's stake in Harley-Davidson earlier this month: "At this stage in the recovery, if and when consumers do decide to pullback on spending, a product considered somewhat upscale that is relying on the marginal consumer to step up to buy (it) is in jeopardy of having a slip-up like they just did."
HD's real problem is the aging baby boom generation. They spurred the huge increase in heavy duty bike sales in the late 1990s/early 2000s, but fifty and sixty year old bones don't heal like 20 year old ones' do. This could be the beginning of HD's long goodbye.
I think a lot of Harley's future problem will be generational. Not too many post-Boomers and later generations seem all that interested in Harleys. Just my anecdotal observation. I certainly haven't done any research on it. Just looking at who's riding what.
You could be right! :>)
over-priced,under-reliable.
The "bad spring" is business-speak for trying to blame something out of their hands... I swear, every company reporting lower earnings last fall/winter blamed the hurricanes in the SE....
Probably the later. Harley is not down nor out! Just a little regrouping. I'm no stock expert, but isn't it just like a normal correction or something? Plus, investors like to buy buy, then sell, sell and profit take. They'll be fine as long as the corporate stockholders hold firm and don't get greedy like other corps. and take ALL the profits.
You are paying for the legend and a one of a kind bike. Buy a rice burner.
Harley needs to trim it's corporate fat by about 50%. It's an incredibly bloated company.
I've owned both to include Triumph and Beemer. Still can't figure out why Harley riders won't wave at a fellow biker unless they're on a Harley. Snooty muthers.
Yeah right...102 years old
Harleys are excellent investments too, they hold their value the best and the older ones are worth more than you paid for them.
Let's see...I'd say its a '48 Panhead. How'd I do?
Perfecto! Believe it or not, it's my mom's.
I always make it a point to wave at all bikers, no matter the make. It is still a big brotherhood...and a lot of those rice-burner owners got more iron butt than I do.
Sooner or later this bubble has got to burst. Although I've been saying that for 5 years. I just don't see how the demand for motorcycles costing from $7,000 to 20,000 and up can be sustained. I would think that, after awhile, everyone who would want one or could afford one would have bought one. It's not like cars where you need one and you drive it everyday. Most people I know put 5,000 miles or less a year on their bike. And they baby them, most of the bikes look better after a couple of years than when they were new. If I owned Harley stock I believe I would be selling it quickly.
As a rice burner owner myself, I always appreciate the wave and make it a point to put my hand out there when I see a bike coming toward me.
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