On Feb. 25, Barron’s Bill Alpert warned investors to stay away from shares of Harley Davidson. At the time, he noted that the declining number if middle-aged white guys, its deteriorating loans, and declining ridership pointed to tough times for the Harley’s stock.
Through last night, Harley’s shares had gained 5% since Bill’s story ran, but after today’s earnings report, it’s fair to say that much of what he predicted was borne out in Harley’s numbers. Here’s Bill’s take on the earnings:
Motorcycle demand continued its downtrend in 2017’s March quarter, and the decline affected Harley-Davidson’s quarterly results. Revenue fell 14% to $1.5 billion, compared to March 2016, as the Milwaukee-based bike maker restrained deliveries to dealers who are laboring to unload last year’s models. With its high fixed costs, the company’s profits fell more steeply, tumbling 26% to $187 million. Despite a 4% reduction in share count (thanks to stock buybacks) earnings per share fell to $1.05, from the year-ago $1.36.
In announcing March results, the Harley said it remained confident in its guidance for 2017, which calls for this year’s sales to come in flat or only slightly down. But the company has proven poor at forecasting its own sales in recent years — clinging to annual forecasts despite poor first and second quarters, then conceding the year’s deteriorating prospects late in the game.
Wall Street generally anticipated the company’s reduced shipments, but was surprised by continued weak retail sales at its dealers, judging from the forecasts compiled by Visible Alpha, a brokerage-owned service that combines the financial models of numerous sell-side analysts. Harley dealers in the U.S. sold 6% fewer motorcycles in the March quarter. Despite Harley’s push to open new dealerships in the Asia Pacific region, unit sales there fell 9%. The analysts in Visible Alpha’s database had expected just a 1% drop in the U.S. and a 5% rise in the Asia Pacific region.
Our February story worried about rising delinquencies and losses on Harley’s motorcycle loans, wondering if the company was trying to avoid discounting its bikes by loosening its credit. Operating income at the company’s captive finance outfit declined 7% in the March period, due to credit losses. That was more than twice the decline expected among the analysts surveyed by Visible Alpha.
In the last couple of years, Wall Street analysts have been pretty deferential to Harley’s guidance and waited for the company to tell them that it wasn’t bucking the motorbiking’s downtrend. Going into today’s announcement, that optimism was evident in the consensus reported by Visible Alpha, where analysts predict that Harley earnings per share will stay roughly flat this year, at $3.82, then rise in 2018 to $4.18. We’ll see how long investors continue to give Harley the benefit of the doubt.
Read the full article here.