Putting Lipstick on HOG

Updated from 4:18 p.m. EST on Jan. 24.

Harley-Davidson (HOG - commentary - Cramer's Take) shares are off by about 3% in late-morning activity. A few takeaways from the quarter and conference call should be emphasized.

First, declining margins are a bad sign, and sometimes companies have to take dramatic steps to improve those margins. I did not hear anything from management that would lead me to believe that the company has any such plans. In fact, management even guided to lower margins for fiscal 2008.

This leads me to the second takeaway: I can't believe the guidance. The company anticipates slightly higher shipments and an increase in revenue, which could be a bit of a stretch for the first quarter. At the same time, margins are expected to decline.

It feels like Harley-Davidson was trying to placate the analysts. The company may have to guide lower before the quarter is over if these estimates are too rosy.

Finally, there were some positives. I like the strong international growth. Also, a concerted effort to reduce shipments in order reduce channel inventory should benefit the company in the future.

It is not time to bottom fish for Harley-Davison shares, but covering investment shorts may be warranted at this juncture.

Harley-Davidson reported fourth-quarter 2007 EPS of 78 cents on revenue of $1.39 billion. For fiscal 2007, the company earned $3.74 on revenue of $5.73 billion.

By my calculation, the gross profit margin declined from 38.00% to 35.67% year over year for the fourth quarter and from 38.49% to 36.92% on a full-year basis. Management attributed the decline in the margin to the spreading of more fixed costs over less unit shipments. Motorcycle shipment data were as follows:

• Total wholesale motorcycle shipments of 81,206 units were a decline of 12.5% year over year.
• Domestic motorcycle shipments of 59,092 declined 20% year over year.
• International motorcycle shipments of 22,114 rose 20.5% year over year.
• Shipments were broken down as 72.8% domestic and 27.2% international; in fourth quarter 2006, international shipments were 19.8%.
• For fiscal 2007, Harley-Davidson shipped 330,619 units, down from 349,196 in 2006, a decrease of 5.3%.

Average revenue per unit increased $590, or 4.5% year over year. This was primarily due to new model year price increases, favorable currency rates and favorable product mix.

Retail sales of motorcycles by U.S. dealers were down 6.2% vs. the overall motorcycle market decreasing 5.0% in 2007. Internationally, fourth-quarter retail sales increased 17.4%. Europe was strong, increasing sales year over year by 10.9%, while Japan was up 4.5% and Canada was up 45.9%. The rest of the world's sales rose 28.6% year over year for the quart. For full year 2007, international sales rose 17.4%.

In the financial services segment, Harley-Davidson's fourth-quarter operating income declined by $9.1 million, or 19.1% year over year. Of this decline, $6.4 million resulted from a writedown of credit securitizations.

Shipment guidance was cautious at 68,000 to 72,000 for first quarter 2008 vs. 67,761 in first quarter 2007. Operationally, for fiscal 2008, EPS growth is expected to be 4% to 7%, with moderate revenue growth and lower operating margins.

HOG Preview: Management Could Guide Down

Harley-Davidson (HOG - commentary - Cramer's Take) is scheduled to report fourth-quarter and full-year 2007 results before the market opens on Friday.

Analysts are expecting the company to earn 82 cents per share on net revenue of $1.34 billion for the quarter. In the year-ago quarter, Harley-Davidson earned 97 cents per share on net revenue of $1.5 billion.

For fiscal 2007, analysts expect the company to earn $3.77 per share despite the company guiding to a range of $3.69 to $3.77. In 2006, Harley-Davidson earned $3.93 per share.

In addition, analysts think that earnings growth will be virtually nil in 2008 as the company is expected to earn only $3.79 this year.

The stock looks like a depiction of Evel Knievel attempting his 1974 jump of Snake River Canyon.

HOG 253 Days (NYSE) Harley-Davidson

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Source: CTS Trend

Shipments of between 328,000 and 332,000 units are expected in 2007, which is down from 349,200 units shipped in 2006. There is a very high probability that Harley-Davidson will further reduce 2008 shipment guidance and, in the process, may have to guide EPS expectations down as well.

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At the time of publication, Rothbort had no positions in the stocks mentioned, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.