Earnings Preview: Harley-Davidson (HOG)

Harley-Davidson (HOG) announced that it would release its results for the second quarter of 2010 before the market opens on July 20, 2010. The Milwaukee-based motorcycle maker posted a profit of 29 cents per share in the first quarter of 2010, overriding the Zacks Consensus Estimate by 3 cents per share. In the upcoming quarter, the Zacks Consensus Estimate for Harley is a profit of 42 cents per share, reflecting an annualized growth of 56%.

With respect to earnings surprises, the company has outdone the Zacks Consensus Estimate over the trailing four quarters. This is reflected in the average earnings surprise of 9.4%, implying that the company has beaten the Zacks Consensus Estimate by the same magnitude over that time period.

The current Zacks Consensus Estimates for the second quarter and full-year 2010 are profits of 42 cents and $1.13, respectively. The upside potential of these estimates, essentially a proxy for future earnings surprises, are 11.91% and 6.19%, respectively.

First Quarter Review

Harley’s profit during the quarter was attributable to aggressive restructuring actions, incorporated in its go-forward business strategy. This included the discontinuation of its Buell product line and the divestment of its MV Agusta unit in order to focus solely on the Harley-Davidson brand.

However, revenues from Motorcycles and Related Products segment fell 19% to $1.04 billion in the quarter, primarily due to lower shipments and higher restructuring costs. The motorcycle maker’s shipments declined 28% to 53,674 units. Harley reiterated its expectations to ship 201,000–212,000 motorcycles to dealers and distributors worldwide in 2010, a reduction of 5%–10% from 2009.

Harley’s Financial Services segment returned to profit after continuous losses since the fourth quarter of 2008. The segment earned $26.7 million during the quarter, an increase of $15.5 million from the year-ago level. The profitability was attributable to an improved credit performance in the retail motorcycle loan portfolio and to a lower cost of funds.

Harley’s restructuring charges rose 38% to $48 million during the quarter. The company continues to expect its restructuring activities to result in total one-time charges of $430 million–$460 million in 2012, including charges of $175 million–$195 million in 2010. In 2010, the company continues to expect savings of $135 million to $155 million from previously announced restructuring activities. Upon completion of the restructuring actions, annual savings could go up to $240 million to $260 million.

Estimate Revisions Trend

Estimates have remained almost stable over the past 60 days, reflecting analysts’ caution on the stock performance. The Zacks Consensus Estimate for 2010 is $1.13 per share, depicting a year-over-year growth of 10%, while it is $2.01 for 2011, translating into a growth of 78%.

Agreement of Analysts

Over the last 30 days, 2 out of 12 analysts covering the stock have revised the estimates upward, while only one adjusted downward. The upward pressure in estimate revisions can be attributable to better retail sales trend, driven by a shortage in inventory.

Over the last 30 days, there has been one downward revision in estimates for 2010 and two downward revisions for 2011 based on the company’s gloomy outlook for worldwide motorcycle shipments. There have been no upward revisions in estimates for 2010 but one upward revision for 2011. The upward revision for 2011 can be attributable to an improvement in the retail sales environment.

Magnitude of Estimate Revisions

Following the first quarter earnings release, estimates for the upcoming quarter, 2010 and 2011 have been raised by 3 cents to 40 cents, 11 cents to $1.13 and 16 cents to $2.10, respectively. This can be attributable to Harley’s improved profit during the quarter, strong performance of the Financial Services segment and expected benefit from restructuring measures. The estimates remained almost stable over the last 60 days by hovering around the post-earnings figure.

Our Take

Harley-Davidson has not been able to attract the younger generation, who are driven toward smaller and cheaper bikes such as those made by Japanese manufacturers Honda Motor Co. (HMC), Suzuki and Yamaha. As a result, its customer base has been getting older.

Higher restructuring expenses are another concern for Harley. In 2009, the company incurred restructuring expenses of $224 million. The company expects charges of $430 million to $460 million through 2012, including $175 million to $195 million in 2010.

Further, Harley expects its global shipments to drop 5%–10% to 201,000–212,000 motorcycles due to the turbulent economy. These factors have led us to recommend the stock as Sell (Zacks #4 Rank) in the short term (1–3 months).

However, Harley’s restructuring activities incorporated in its go-forward business strategy have been successful. The activities included the discontinuation of its Buell product line and the divestment of its MV Agusta unit, as well as the consolidation of production facilities and a reduction of approximately 2,700 to 2,900 hourly production positions and about 720 non-production, primarily salaried positions within the Motorcycles segment and about 100 salaried positions in the Financial Services segment.

The headcount reductions, begun in 2009, are expected to be completed by 2011. In the first quarter of 2010, the activities helped the company to turn a profit despite lower revenues. For 2010, the company expects savings of $135 million to $155 million from previously-announced restructuring activities. Upon completion of restructuring actions, annual savings could go up to between $240 million and $260 million.

This, along with an expected recovery in the overall retail sales, have led us to recommend the shares of the company as Neutral in the long term (6+ months).

HARLEY-DAVIDSON (HOG): Free Stock Analysis Report
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