January 7, 2008

A Cheap HOG

From Value Plays:

Harley shares have fallen almost 50% since their December 2006 all-time highs. As a matter of fact, one has to go back to the summer of 2003 to find shares trading at these levels. Currently this 2003 share price level comes with the advantage of the company earning 57% more per share now than it did then. That being said, my guess is that we may be able to pick them up at 2000 levels ($36) or dare I say it, 1998 (below $36)!?! Although to be honest I do not think I could resist starting to pick them up if they go below $40. They would just be so painfully cheap at those levels.

On January 25th, Harley announces Q4 earnings and when you consider they idled 5,400 workers in November due to sluggish sales, and credit markets have continued to tighten, one cannot expect results to be good. In fact, I would be very surprised if they did not just purely disappoint. I would expect their credit portfolio to be suffering a substantial rise in credit defaults. It is through no fault of management, the environment they are operating in now just is not conducive to people buying their bikes, especially the most expensive higher margin ones.

Now, that also means that when this environment clears up, and it eventually will, there will be plenty of pent up demand for the bikes. One good thing about a Harley, there is NO substitute and the desire to upgrade never goes away, if anything it gets stronger.

Another positive is that 8% share repurchase plan they enacted which will not require debt to finalize. Add the now near 3% yield (and growing) on shares and I hope you are getting the picture.

Harley has everything you want in an investment. It is a wide-moat business, produces plenty of cash, has conservative management, beyond loyal customers (ever see anyone with a Coke (KO), Starbucks (SBUX) or Google (GOOG) tatoo?) , now a nice dividend and plenty of growth ahead (think China and Latin America).

All we are waiting for now is price we can drool over....

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