Harley-Davidson Inc. (HOG) is scheduled to release its second quarter 2011 results before the market opens on July 19, 2011. Milwaukee-Wisconsin based Harley-Davidson earned a profit of 51 cents per share in the first quarter, tad lower than the Zacks Consensus Estimate of 53 cents per share.
For the upcoming quarter, the Zacks Consensus Estimate for Harley-Davidson is pegged at a profit of 70 cents per share, which reflects an annualized improvement of 19%. The upside potential of the estimate, essentially a proxy for future earnings surprises, is 1.43%.
With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. The average earnings surprise is 25.57%, with a negative surprise being recorded in the last quarter only.
First Quarter Recap
Revenues from Motorcycles and Related Products grew 2.5% to $1.06 billion driven by a marginal rise in shipments. Revenue from Harley-Davidson motorcycles increased 3% to $833.4 million.
The company shipped 53,827 motorcycles to global dealers and distributors, up from 53,674 motorcycles in the first quarter of 2010. Harley’s worldwide dealer retail sales of new motorcycles rose 3.5% globally, including a 0.5% decline in the U.S. and an 11.3% rise in international markets.
Revenues from Parts and Accessories escalated 10.2% to $164.3 million and revenues from General Merchandise – which includes MotorClothes apparel – dipped 5.6% to $62.6 million.
Gross margin deteriorated to 33.1% from 36.6% in the year-ago period. It was adversely affected by temporary production inefficiencies related to the restructuring and transformation of production operations and by foreign exchange and raw materials costs. Harley had an operating profit of $193 million (11.8%) in the quarter compared with $152.8 million (12.2%) in the year-ago period.
Revenues in the Financial Services segment ebbed 5% to $161.9 million. The segment reported an operating income of $67.9 million, up 154.6% from $26.7 million in the year-ago quarter. This was attributable to continued improvement in credit performance.
Harley had cash and cash equivalents of $932.5 million as of March 27, 2011 compared with $1.44 billion in the corresponding period of 2009. Long-term debt decreased to $2.96 billion from $3.26 billion a year ago. Consequently, long-term debt to capitalization ratio reduced to 56% from 61% a year ago.
Given the supply chain interruption arising from the March 11 earthquake and tsunami in Japan, Harley expects to ship 215,000 to 228,000 motorcycles to dealers and distributors worldwide in 2011 compared with the prior shipment guidance of 221,000 to 228,000 motorcycles. In the second quarter of 2011, the company anticipates shipping 62,000 to 67,000 motorcycles.
Harley expects gross margin between 33.5% and 35.0% in 2011, versus the previous guidance of 34.0% to 35.0%. It continues to expect full-year capital expenditures between $210 million and $230 million, including $60 million to $75 million to support restructuring activities.
Estimate Revisions Trend
Earnings estimate for the second quarter of fiscal 2011 is currently pegged at a profit of 70 cents per share. The analysts gather confidence from the company's actions given its various initiatives and improved cash flow position.
Agreement of Estimate Revisions
Out of the 14 analysts covering the stock for the second quarter of fiscal 2011, one has downgraded the stock in the past 30 days while two other analysts have upgraded the stock during the same period. Out of the two firms who have upgraded the stock in the past one month, one has revised its estimate upward in the last seven days.
Magnitude of Estimate Revisions
Following the first quarter earnings release in April, the second quarter earnings per share were projected at a profit of 71 cents. However, in the last 60 days, the estimate dropped and stood at a profit of 69 cents per share. The analysts retained the estimate in the past 30 days. Then again they increased the estimate by a penny to 70 cents per share in the past 7 days.
Our Take
Harley-Davidson commands roughly 50% of the U.S. market, enjoying scale advantages over most competitors. Its key competitors include Ford Motor Co. (F) and PACCAR Inc. (PCAR).
Furthermore, the company maintains an extremely strong franchise. It has a network of over 680 independent U.S. dealers (over 1,300 worldwide), 55% of which exclusively market Harley-Davidson.
Moreover, Harley-Davidson’s cash flow and debt position have improved. In 2010, the company had an operating cash flow of $1.16 billion, a significant improvement over $609 million in the prior year, driven by the progress in profit. Furthermore, its long-term debt decreased to $2.96 billion as of March 31, 2011 from $3.26 billion a year ago.
However, the company’s customer base is aging. The company has not been able to attract younger generations, who are driven toward smaller and cheaper bikes such as those made by Japanese manufacturers Honda, Suzuki and Yamaha. The company’s strategy to focus on faster, smaller bike segments by acquiring Buell and MV Agusta failed.
In addition, Harley-Davidson has an expensive product range, which attracts only premium consumers. The problem has become more pronounced due to the contraction in consumer purchasing power in the current economic environment.
Thus, keeping these in mind, the shares of Harley-Davidson are maintaining a Zacks #3 Rank, which translates into a short-term Hold rating. Alongside, the shares also have a Neutral recommendation for the long term.
FORD MOTOR CO (F): Free Stock Analysis Report
HARLEY-DAVIDSON (HOG): Free Stock Analysis Report
PACCAR INC (PCAR): Free Stock Analysis Report
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