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Tech stocks - Monday, January 5, 2009

The Sportster Is The Best Way To Invest In Harley-Davidson

With earnings announcements only a few days away, we expect investors to nervously scour their portfolios and possibly dump a few stocks that they believe will deliver disappointing news. While we are optimistic that 2009 will be a far better year for the market than 2008, that doesn't mean we're not going to have some days that will test our faith in the market. Investor's might be disappointed that market opened the week down but the staff at tech:stocker was happy that it wasn't a triple-digit decline today.

Looking at the bright side, we were happy to hear that Steve Jobs' health isn't as bad as people shorting the stock expected. We're not fans of shorting stocks as its far more rewarding to bet on a company's success than their failures. Of course, we did reaffirm our faith in Apple back on December 16, 2008 setting a 12-month target price of $135. We're very anxious to see how we do against the shorts.

Getting back to the "grab bag" of picks that we started last week, today we decided to take a look at the motorcycle manufacturer that has come to define machismo in America, Harley-Davidson (HOG:NYSE).

While other American motorcycle manufacturers like Indian competed with Harley-Davidson back in the 1940s, the company is now king of the road, and sales, amongst its domestic counterparts. As Japanese bike manufacturers like Honda, Kawasaki, and Suzuki try to compete for a share in the touring market with their less expensive versions of a Hog, we still see Harley-Davidson as the brand leader in this category.

We are focused on touring bikes as these behemoths of bike world are aimed at riders who are completely sold on the motorcycle lifestyle. These riders wouldn't dream of buying a bike to save a few bucks on gas, impress their neighbors, or to rat race on 280 through Brooklyn. These are bike loyalists who will stick by their brand for as long as they are made and the rider is physically able to mount it.

So Harley-Davidson's latest "Ride For Free" campaign is very intriguing to us. Anyone who has recently watched Steve McQueen ride to glory in "The Great Escape" (yes, we know Mr. McQueen was riding a 1961 Triumph TR6 Trophy but good luck finding one of those) or Jack Nicholson tour the country on a modified Hydraglide in "Easy Rider" usually get the itch to buy a bike. With Harley-Davidson's "Ride For Free" promotion, these new riders can mount an entry-level Sporster and trade the bike in a year later for a bigger and better bike and receive the original purchase price for trade-in value.

Initially we were skeptical of this campaign as the Sporster used to have a reputation as a cheaply built step-son of the touring bikes that offered a rough ride and poor reliability. Not anymore. Now the Sportster has rubberized engine mounts and similar production quality to that of the Road King and other bigger bikes. A year on a Sportster could help breed a new generation of Harley owners. And this is important to Harley.

Harley-Davidson currently has an unfavorable total debt to total equity ratio and its revolving debt appears to be growing rapidly. This is particularly troublesome from an investment standpoint as the company had a disappointing third quarter. Revenue for Q3 2008 was down 7.7 percent and net income was down 37.1 percent and third quarter diluted earnings were down 33.6 percent.

These numbers were fairly surprising to us as CEO James L. Zeimer was previously the company's CFO. During is his reign as CFO, Mr. Zeimer oversaw five 2-1 stock splits from 1990 – 2000. But when Mr. Zeimer took the reins in 2005, the stock saw a peak in October 2006 at $69.81 and is down 72.88 percent since then.

Mr. Zeimer's most interesting move is the purchase of Italian motorcycle maker MV Augusta Group for $108 million. At the time Harley-Davidson was claiming that its European sales were growing so the purchase of a manufacturer that sold only 5,800 bikes in Europe was quiet puzzling. While this move could help Harley-Davidson crack the "sport" market that has eluded them even with the acquisition of Buell (these are actually more performance-oriented bikes versus sport bikes).

Our hesitation on recommending Harley-Davidson is whether or not the company promotes another insider to the top spot (Mr. Zeimer has been with the company 40 years, starting out as a lift operator) or do they lure a successful CEO to lead one of the nation's best brands. And if they do hire someone with a financial background like Mr. Zeimer, we hope they can do a better job controlling costs while increasing profits. Until the company can better control its debt, we believe buying a new Sportster is a far better investment as it least it won't go down in value over the next year (as long as you don't lay it down).