Why I Bought Harley Davidson

Yesterday I spent £61,371 ($120,613) buying Harley Davidson (HOG) shares, paying an average of $42.12 per share. Here's why:

• Strength of Brand: 10/10
• Level of Debt: 9/10
• Quality of Management: 9/10
• Price: 9/10

The Harley Davidson brand is legendary. One in two heavyweight motorcycles sold in the US is a Harley, and has been for at least 17 years. Some people even proudly get tattoos of the Harley Davidson logo. This strength is reflected in a return on equity of more than 30% (excluding their financial operations). The brand has existed for 100 years, and will probably still be around in another 100.

Harley Davidson's financial position is strong. The main operation is debt-free, and its strong cash flow means the debt from its financing operations could be paid off in just over a year.

I also like the way it manages its share repurchases. Here's their record since 2004:


Notice how the large blue bars tend to correspond to green or yellow prices. Rather than constantly buying the stock at the prevailing price, Harley Davidson varies the size of purchases according their perceived value. From the table, it looks like management now value the shares at around $55-$65. We also had a director buying 100,000 shares in December for around $48 per share. And now, with estimated 2007 earnings of $3.74, the price-earnings ratio is around 11.3.

The stock sure looks like a bargain, so why has Mr Market thrown it in the dumpster? It's true that Harley Davidson is going through a bad patch right now. 2007 will be the first year for a long time that shipments have been reduced. Partly this is a result of so much production in previous years - new Harley bikes now have to compete with second-hand ones. And since a glut in the market also damages the Harley brand, reducing supply is the best long-term solution.

But the market is fixated on another reason for a drop in production: Recession. Harley Davidson is the poster child for what happens to a luxury brand during an economic slowdown. Apparently all their motorcycles will be sold as scrap metal in exchange for a few loaves of bread. Well, let's look at earnings during the last US recession in 1990/91:

Earnings per share dipped, and then came roaring back to life as the economy took off. Things could well be different this time - there are now more than 4 times as many Harleys being produced. But I think the market has over-reacted, and am putting my money where my mouth is.