Harley-Davidson Inc. (NYSE:HOG) is perhaps the best known manufacturer of motorcycles on the globe. What you may not know is that the stock is now down over 5 percent year-to-date, while the overall market continues to move higher. In fact, Harley-Davidson is now in the middle of its 52 week range, and looks set to ride itself lower on the back of a disappointing earnings report. The question we all have now is “just what do I do with the stock?” At 17 times earnings, it is a tough call to determine whether to cut the hog loose, for lack of a better pun. An analysis of the company’s recent performance is justified.
The company’s second-quarter diluted earnings per share came in at $1.62. This was an improvement of 33.9 percent compared to last year due to higher motorcycle shipments and continued improvement in operating efficiencies. Net income was $354.2 million on consolidated revenue of $2.00 billion, compared to net income of $271.7 million in the year-ago period on consolidated revenue of $1.79 billion. Operating income from motorcycles and related products grew 32.3 percent to $473.3 million, compared to operating income of $357.7 million in the year-ago period.
For the purposes of this article, I will stick to the core business, and that is motorcycle and accessories sales. I actually thought the quarter was pretty darn good. Revenue from motorcycle sales grew 16.2 percent to $1.48 billion, compared to revenue of $1.27 billion in the year-ago period. The company shipped 92,217 motorcycles to dealers and distributors worldwide during the quarter, in line with guidance and a 9.0 percent increase compared to shipments of 84,606 motorcycles in the year-ago period.
Revenue from motorcycle parts and accessories was $271.6 million during the quarter, up 0.7 percent, and revenue from general merchandise was $76.4 million, down 6.5 percent, compared to the year-ago period. Even gross margin was 39.5 percent in the second quarter of 2014, compared to 36.9 percent in the second quarter of 2013. Second-quarter operating margin from motorcycles and related products was 25.8 percent, compared to operating margin of 21.9 percent in last year’s second-quarter.
As a far as the company goes, earnings, revenues and gross margin all improved. One sticking point is that dealers worldwide sold 90,218 new Harley-Davidson motorcycles in the second-quarter of 2014 compared to 90,193 motorcycles in the year-ago quarter. In the U.S., dealers sold 58,225 new Harley-Davidson motorcycles in the quarter, compared to sales of 58,241 motorcycles in the year-ago period. In international markets, dealers sold 31,993 new Harley-Davidson motorcycles during the second-quarter, compared to 31,952 motorcycles in the year-ago period, with sales up 7.0 percent in the European Region and 1.5 percent in the Asia Pacific Region, and down 10.4 percent in the Latin America Region and 18.0 percent in Canada. This news hurt the stock. Harley-Davidson, Inc. Chair, President and Chief Executive Officer Keith Wandell, stated:
“Harley-Davidson’s second-quarter results reflect the financial strength of the company and brand, including the benefits of continuous improvement throughout our operation. As a customer-led organization, our employees, dealers in 90 countries and suppliers are focused every day on providing outstanding products and experiences for customers around the world. U.S. retail Harley-Davidson sales fell short of our expectations in the second-quarter. Because we are committed to managing supply in line with demand, we are reducing our full-year shipment plan and now expect shipment growth of approximately 3.5 to 5.5 percent over last year; the company previously had forecast full-year shipment growth of approximately 7 to 9 percent. We believe the underlying demand fundamentals of the business remain intact. We continue to see a strong response to the new Rushmore models as well as great interest in the Harley-Davidson Street 750 and 500, which began to hit dealer showrooms in late June.”
There you have it. The company performed rather well in the quarter financially. But it’s the bolded quote above from the CEO which is sending shares lower. A reduction of the full-year shipment plan to only show shipment growth of approximately 3.5 to 5.5 percent over last year relative to previous guidance for full-year shipment growth of approximately 7 to 9 percent is the reasons shares are being decimated. It is certainly disappointing. However, the financials of the company are intact. I do not think you should sell here, but you shouldn’t necessarily buy the dip. I would instead hold through this patch until the next report, maybe trading around the core position to earn income. But by no means should you cut the hog loose.
Disclosure: Christopher F. Davis holds no position in any stocks mentioned and has no plans to initiate a position in the next 72 hours. He has hold rating on Harley-Davidson and a $60 price target.