American Motorcycle Dealer AMD 178 May 2014 | Page 4

Harley-Davidson could be
vulnerable to the vultures
M

any, many years ago I once wrote a piece for this column
saying "one day, everyone will own a Harley"!
That was in response to what at the time (mid 1990's through
to around 2006/7) was an apparently relentless and unstoppable
juggernaut of ever better quarterly fiscals. Well, we all know how that
ended, eventually!
However, in response to one industry friend, who five years ago said that those
days will never come back, that era is over and that Harley had nowhere to go but
ever further down, I'm now very tempted to play the "told ya so" card, as their
quarter one numbers for this year see them marching inexorably forward again.
However, whilst it might appear that it is a return to
"business as usual", the differences beneath the
surface are very interesting and say a lot about the
changed times we live in - changes that were already
'in-play' for a long time before the downturn, but have
become a lot more apparent a lot sooner because of
the downturn.
In Harley's case the obvious change is in the demographics of the sales they are
achieving - their so-called "outreach" consumer targets. But there is more to it than
that alone.
Maintaining the "core" customer base while simultaneously attracting new
customers who couldn't be more dissimilar is quite an achievement - one any
marketing led organization would be proud of.
Regardless of the apparent market reaction to their new model initiatives such
as the 'Rushmores' and the 'Baby Rods', they are primarily design and styling hits
than engineering triumphs though, and while there is absolutely nothing whatsoever
wrong with that, it is remarkable that Harley have managed their turn-around largely
through cosmetics rather than metal.
Harley made a big deal about the 'Streets' being the first new platform for 15
years or whatever (and they only just qualify as such, if using a generous
interpretation of the concept), and in their first quarter 2014 they point with much
fanfare to their demographic achievements - and they are right to do so.
Their primary success has been in meeting marketing goals, and that is what has
restored sanity to a balance sheet that at one stage looked like it was going to drag
them back into the mid 1980’s abyss from whence they'd come.
Although plenty of Harley dealers have been bemoaning promotional weakness
and inactivity this past winter, the new marketing culture the company's rebuilt and
marketing hierarchy deployed in response to the goals set by CEO Keith Wandell
have been executed flawlessly and have delivered results that have (for the most
part) got shareholders drooling.
Certainly the bounce in Harley's stock price from the sub $8.00 mark it tumbled
to in 2009 bears more in common with a return to the "good old days" of $70 than
it does to the stretched bungee cord of halved sales and a return to loss-making.
However, the absence of a genuinely new platform and genuinely new balance

sheet opportunity (of the kind that Buell and MV Agusta would have eventually
represented) says much about the realities of the Milwaukee balance sheet.
Just as its once take-over target Ducati has been swallowed up by VAG
(Volkswagen Audi Group), and at a time when MV Agusta are vehemently denying
rumors of a courtship by GM, and at a time when both EBR and KTM (another
company that once came within a nano-second of becoming a part of Harley's
balance sheet) are pretty much half owned by Indian manufacturers, and Chinese
manufacturers are poised to 'hoover-up' so-called 'Heritage' brands of all kinds
whenever they come on the block, rumors about Harley-Davidson's vulnerability to
big equity or automotive avarice remain persistent; they just won't go away.
With the kind of capital required to truly embrace
other areas of the motorcycle industry (either through
acquisition or through engineering) appearing to be
beyond present finances, and be something far from
the mind of existing stock holders, then they are
vulnerable. There is always a bigger fish, and even
though we are barely out of recession yet, M&A activity
is heading for near epidemic proportions as fund managers thrash about in a frenzy
of portfolio gap-filling while there are still tasty treats to be had.
As bait goes, Harley-Davidson is a juicy worm. It is pretty much debt-free (in ratio
terms at any rate), it is pretty much self-contained, and is pretty much an ATM waiting
for a PIN code.
As a start point for an investment portfolio, or as an addition to an established
fund, Harley has "buy me" stamped all over it, especially if another marque or
emerging brand from elsewhere in the riding landscape could be stabled with it.
In contrast to Harley's paralysis in such matters, look at the activity over at their
Midwestern nemesis - Polaris. It was always a matter of record that there was concern
enough about their progress with Victory, but the’ sang froid’ coming out of
Milwaukee when Polaris acquired the Indian Motorcycles operation from Stephen
Julius (Stellican) has fooled nobody.
With Polaris making plays in the electric and utility/delivery vehicle markets, and
beefing up their PG&A income streams (that always lucrative driver of stakeholder
dividends as Harley themselves know only too well), investors with an eye for return
timescales could see the opportunity to 'off' their stock without having to get their
funds dirty by actually having to do anything as tawdry as actually compete wi Ѡ)