Commentary: Harley Investors May Get a Wobbly Ride

By Joseph Weber

For much of the past year, Harley-Davidson Inc. (HDI ) was the stock market equivalent of an Evel Knievel act. With a couple of spills along the way, shares careered between $32 last spring and a current dizzying $53. Are they riding for a fall again? Troublingly for folks who admire the gleaming, chrome-laden machines, signs are growing that Harley investors could soon suffer another heart-stopper.

Consider Harley customer Bob Johnson, 52, vice-president of an Orem (Utah) maker of oil-industry tools. Back in 2000, when Johnson bought his Softail Fat Boy, he had to wait five months and pay $1,000 over suggested retail. Even then, he considered himself lucky: In Texas, Harleys were fetching $4,000 to $5,000 over list. But last December, he snared an Electra Glide Classic for $1,200 below retail and rode away on his tricked-out $16,770 touring machine. "They had inventory, and they were actually discounting," he crows.

Johnson's good fortune may grind the gears for Harley's investors. The marvel of Milwaukee, which roared back from near-ruin in 1986 to dazzle investors and bikers alike with its marketing artistry, financial savvy, and sheer mystique may be facing a patch of rough road. It's losing market share to Japanese rivals such as Honda Motor Co., seeing lower prices for some older bikes that used to trade at a premium, and facing a peculiar marketing headache stemming from its upcoming 100th anniversary. Buyers seem to be hanging back, awaiting next year's collector-edition models.

As dealers in places as far-flung as Illinois, Texas, and Delaware tell it, Harley has been stuffing showrooms with 2002 models in recent months. Partly because it books shipments to dealers as sales, it was able to report a seemingly recession-defying 26% rise in 2001 net income, to $437.8 million, on a 15.7% gain in sales, to $3.36 billion. After hiking its output last year by 14.6%, it plans to churn out 10% more--to a record 258,000 bikes--this year. Chief Financial Officer James L. Ziemer says Harley wants to "narrow the gap" between supply and demand in order to curb the long-standing--but fast-diminishing--practice of selling bikes at a premium.

Since scarcity has long been part of Harley's appeal, that's quite a change. Even as Harley ramped up production during the 1990s, buyers waited months for their dream machines. The longer the waits, the more Wall Street loved Harley. At about $53, the stock is worth a dizzying 32 times estimated 2002 earnings of $1.66 a share, according to Thomson Financial/First Call. Even so, each of the dozen Wall Street analysts who follow the stock has a "buy" or "strong buy," confident Harley can expand earnings 16% this year and a further 15% in 2003.

To hit those targets, Harley's 630 dealers will have to clear out 2002 models by July, when the '03s come roaring in. But buyers aren't clamoring for them. "We had a two-year waiting list at one time. Last year, it was close to a year. All of a sudden, for 2002, it just went away," says Howard M. Brown, general manager of Chicago Harley-Davidson, which has 50 unsold bikes.

Even without recession or overproduction, Harley's growth may suffer. The median age of its buyers is nearly 46, up from 35 in 1987. Wooing younger buyers is tough, especially when the company's sleek, new high-performance V-Rod bike lists at a wallet-busting $16,995. What's more, the company's share of the U.S. new-bike market has dropped to 23%, down from a 27% peak in 1997 as Japanese rivals make inroads.

With lots of sentiment and image built into Harley stock, even slight hints of trouble can send it into a violent slide. Last spring, shares plunged 25% in seven weeks when word leaked--wrongly, as it turned out--that monthly sales were slipping. Don J. Brown of DJB Associates LLC, an industry consulting firm, is again seeing "a modest decline" in sales on a month-to-month basis. Harley's fans on Wall Street will have to hope that it proves to be short-lived. Otherwise, they may be facing some serious time in the dirt.

Weber covers financial markets from Chicago.

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