Harley-Davidson Riding on Souped-Up Results

Updated from 10:11 a.m. EDT on Oct. 18.

Harley-Davidson (HOG - commentary - Cramer's Take) reported third-quarter 2007 (ending September) fully diluted EPS of $1.07 (-11% vs. earnings for the same quarter last year/+2% positive surprise) on revenue of $1.54 billion (-6% vs. same quarter last year/+1% positive surprise). The surprise was primarily due to greater-than-expected share purchase activity; the company repurchased 9.7 million more shares in the quarter, or 4% of prior outstanding shares, continuing its long-standing aggressive share repurchase use of ample free cash flow. Excluding the repo impact, results also weren't as bad as feared, but they weren't good either.

As previously flagged by management, third-quarter 2007 shipments contracted -11%, to 86,535, reflecting shrinking U.S. domestic demand for new motorcycles partially offset by higher international growth plus the foreign exchange translation. This quarter's reversal underscores the company's OEM sales sensitivity to rising gas prices and U.S. credit/housing conditions. Indeed, management reiterated that 2008 will likely continue to see a challenging U.S. retail market. Happily, they maintained downgraded 2007/2008 forecast ranges (inclusive of current consensus estimates). Of note, though, third-quarter 2007 gross-margin contraction (38% from 40%) will not likely be a one-off event as inventory increased +9% during the quarter.

Harley-Davidson opened down -2% but recovered half the loss through the morning conference call. The mini-rebound won't be the last word as the current 12-month downtrend remains in tact. Technical indicators -- including moving average convergence/divergence, on-balance volume and relative strength -- no longer offer support for an attempt to re-obtain the previous eight-year, upward-sloping channel. Current earnings results may have squeaked out some near-term comfort for investors, and shares are one-third cheaper than a peak year ago, but the new less favorable operating environment has only just begun. The best case trading scenario right now offers increasingly unlikely +10% upside to resistance but with potential downside equal to or double that. Better continue to treat Harley-Davison with caution as you approach.

Harley-Davidson: Preview: You Might Need a Helmet

Harley-Davidson (HOG - commentary - Cramer's Take) is scheduled to report third-quarter 2007 earnings (ending September) in a conference call at 9:00 a.m. EDT on Friday, Oct. 19. The current consensus estimate for fully diluted quarterly EPS is $1.05 (-13% vs. earnings for the same quarter last year) on revenue of $1.5 billion (-12% vs. same quarter last year). Despite the company's history of matching or exceeding estimates, a negative surprise is possible, as current estimates have been downgraded by -15% over the last quarter.

In the recent quarter (second quarter 2007 ending June), Harley-Davidson again surprised analysts positively growing earnings +25% excluding extraordinary items. Strong bottom-line results reflected +18% revenue growth, as buoyant international sales offset a domestic decline, and a 27-basis-point operating-margin expansion. However, this quarter's sharply reduced expectations underscore the company's sensitivity to rising gas prices and credit/housing conditions. Accordingly, this week investors will be watching for the current/projected domestic sales impact of continued tight credit, prompt inventory management and continued strong international execution.

Harley-Davidson shares currently trade within a 12-month downward-sloping price channel that recently broke through the bottom of a previous well defined eight-year, upward-sloping channel. Investors appear to be trying to re-obtain Harley-Davidson's long-term trend by filling the September gap back to circa $55 (or +12% above current price). Near-term technicals provide some tepid support. Even if successful, though, such efforts merely place the stock at the top resistance band of its recent downward trend.

Harley-Davidson has certainly fallen off its perch, dropping -35% from highs, which also deflated valuation (1.1x PEG based on 12x P/E forward 12-months, or two-thirds of five-year average). Current -4% EPS growth projections (forward 12 months) and near-term reporting uncertainty, however, do not exactly inspire confidence. Harley-Davidson is the dominant brand in its market, but its market is under significant pressure right now. As such, downside may not yet be complete, and next support is $45 and $35 (-8% and -29% respectively). There is some upside to potentially be had, but it is likely smarter to pass on by for now.

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At the time of publication, White held no positions in the stocks mentioned.