Are Street

			Harley hits a rough patch?
			Are Street-wary investors stepping off Harley-Davidson's profitable market ride?
			By James P. Miller February 5, 2001: 3:45 p.m. ET

CHICAGO (KRT) - Among the thousands of companies whose shares trade on Wall Street, Harley-Davidson Inc. has long held an enviable status: leather-clad customers snap up the company's legendary motorcycles as fast as they come off the production line, while pinstriped institutional investors bid for Harley shares like they were tickets to a sold-out rock concert.

The Milwaukee motorcycle maker "has the only brand that customers regularly tattoo on their bodies," notes William Blair & Co. analyst Richard Fradin, and the near-mystical aura that surrounds Harley's hulking, hard-to-obtain bikes has served the company's bottom line well.

But lately, Wall Street's ardor has cooled a bit, even though the company continues to churn out record profits. Harley (HDI: Research, Estimates)'s highflying stock took a hit in December after two analysts found evidence that buyers are starting to resist forking over the big premium that certain Harley dealers have been charging above the suggested sticker price.

Even though Harley's corporate revenues aren't directly affected by whether its dealers manage to wring a premium from retail customers, just the hint that a softening U.S. economy may dampen demand for the company's bikes has chilled investor enthusiasm.

Is Harley-Davidson, after traveling a remarkably long stretch of smooth financial highway, about to hit a patch of rougher road? Probably not, experts say. But analyzing the company's prospects can be tricky, because the same cultlike following that insulates Harley from economic potholes renders many of the conventional financial yardsticks useless.

Blessed with one of the world's most potent brands, Harley deals in a irrational marketplace skewed by image and artificially imposed scarcity -- more like the diamond industry than the standard manufacturing model.

"Despite the volatility of the motorcycle industry as a whole," according to Lehman Brothers analyst Felicia Kantor, Harley's cycle sales "practically transcend economic factors."

Most companies run advertisements to build sales, but Harley doesn't. In fact, it rakes in tens of millions of dollars yearly by licensing its logo for use on everything from Harley-brand coffee to Harley-motif Christmas-tree ornaments.

Most companies' worries include making enough product to meet demand and pricing competitively, to ensure they don't lose potential sales to a rival. Harley, confident of its allure, does neither.

Already, the sagging economy has cut into sales of such big-ticket items as autos, appliances and personal computers: products that consumers typically buy only after sensibly weighing the pros and cons of the expenditure. But common sense doesn't play much of a role in the decision to purchase one of Harley's rumbling "hogs," which cost from $8,000 to $24,000 and are the object of consumer lust. That, author Brock Yates' points out in his book, "Outlaw Machine," is precisely because they are "dreadful, irresponsible machines with no socially redeeming qualities."

The Harley cult is so strong that even though Harley has been building bikes as fast as it can for the past several years, customers often must wait a year or longer before they take delivery. Harley has periodically boosted its production capacity, but it likes to keep the supply of its product limited in order to avoid diluting the prestige of ownership.

"The worst thing in the world they could do is satisfy demand," said brand-development expert Al Ries, of the Roswell, Ga., marketing firm Ries & Ries. "The minute you do that, you kill the mystique."

Harley concedes the point, but officials are worried they may be having too much of a good thing. "We think it's appropriate to be hard to get," said Chief Financial Officer James L. Ziemer. "But a year or more we don't think is appropriate," he said in an interview. "We'd like to get that wait down to six months."

Everything is relative, of course. In the 1980's, quality-control problems and a surge in Japanese competition brought the Milwaukee motorcycle maker to the edge of bankruptcy. These days, in contrast, Harley is riding high on the hog -- producing at full capacity and generating record earnings -- and the question for investors isn't whether the company will stay solvent, but whether its shares still merit their sky-high valuation.

After quadrupling in less than three years, Harley shares were trading in late 2000 at the exalted level known as "priced for perfection," with a price-to-earnings multiple so rich that it can only be justified if conditions at the company remain flawless. And even CFO Ziemer says Harley is "somewhat recession-resistant, but not recession-proof."

Ironically, while its capacity constraints are restricting Harley's near-term profits, they are also a principal reason the one-time Rust Belt loser has become a high-flying stock. Because its plants are running flat-out and it has a huge order backlog, investors can predict almost exactly how many bikes the company will build in the coming 12 months -- and how much money Harley will earn. The company hasn't missed a quarterly earnings target for at least 28 consecutive quarters.

"With Wall Street, you always look for consistent performance," notes Dain Rauscher analyst John P. Hughes. "More than anything else," he said, Harley captivated investors with its "steady, consistent earnings progression." Hughes, who carries a 'neutral' rating on Harley's shares, said, "I like the company but the not the valuation of the stock, which is fairly aggressive."

While the big order backlog provides the company with a financial cushion, Hughes says, "If we had a significant slowdown in the economy, that could bring down their growth."

But Lehman's Kantor, who initiated coverage of Harley recently with a "buy" rating, says, "I still think there's a lot of growth to this company." While Harley hasn't provided much detail, she says, the company will likely unveil its growth plan in January for the next several years. The plan may well include a near-term capacity increase, which would set the stage for higher profits, she said.

Harley hasn't always been such an earnings superstar. Born in 1903, the company outlasted a host of American rivals to become, by the mid-1950s, the nation's only major heavy-motorcycle maker. Then in the 1960s, it began a lengthy, unhappy period during which the Midwestern company lost much of its market to Japanese competition. In 1969, Harley was acquired by recreational-products maker AMF, but AMF sold the struggling unit to a management-led buyout group in 1981.

Beset by inefficient production methods and quality-control problems that damaged its reputation, Harley flirted with bankruptcy. Then the federal government agreed to grant temporary motorcycle-import tariffs, which gave Harley's new management breathing room to adopt progressive manufacturing techniques.

The makeover made Harley competitive once again, and the company's rebound made it a symbol of the Rust Belt's ability to learn new tricks. In 1986, Harley returned to public ownership through an initial offering.

Harley's comeback, particularly the fiscal triumph of the past several years, is the result of an inspired product repositioning that transformed a symbol of defiant alienation into a profit juggernaut.

When faster, better-engineered Japanese rivals began to appear in the 1960s, Harley's conservative management stayed with the big, rough-riding machines that had long been the bikes of choice for motorcycle cops, military couriers and blue-collar hobbyists who didn't mind the occasional breakdown.

As mainstream riders increasingly deserted Harley in favor of technically superior Japanese models, Harley's retro-look hogs became increasingly identified with scary biker gangs like the Hells Angels, who wouldn't own a bike not made in America. Harleys became a symbol of the anti-authoritarian loner, as well: Peter Fonda and Dennis Hopper rode chopped Harleys in the 60s counterculture classic "Easy Rider," and a coughing Harley engine started off the pop song "Leader of the Pack."

For years, the company had tried to downplay the outlaw image that its menacing-looking machines conjured. In a stroke of insight, however, Harley's new management moved to turn what had been a vice into a virtue.

Harley retained the belligerent look of its earlier bikes, but upgraded the reliability to appeal to weekend riders. The bad-boy aura was sanitized -- just enough -- and became a marketing tool to draw in white-collar professionals and other mainstream customers.

Harley dealerships, many of which had been clubby hangouts, were brightened up to appeal to Middle Americans. The company co-opted the biker-gang issue by developing its own rider organization, the Harley Owners Group, and sponsoring hugely popular regional and national meets.



	With Wall Street, you always look for consistent performance. More than anything else Harley [has had] steady, consistent earnings progression. I like the company but the not the valuation of the stock, which is fairly aggressive.



	John P. Highes, analyst Dain Rauscher

Riding a big, snarling Harley remains a statement of individuality, but it's a non-threatening statement -- and one that's increasingly reserved for the well-heeled. Chicago financier Sam Zell has long been a Harley rider. So are countless dentists, real estate agents and other middle-aged guys who couldn't afford to buy a bike when they were young.

By moving up-market, Harley has tapped directly into the fast-swelling ranks of empty-nester baby boomers with lots of expendable income. The average household income for a Harley rider now tops $74,000. "The demographics bode very favorably for the company," said Lehman's Kantor. "We've followed the boomers," said Ziemer, Harley's finance chief, adding that in the last decade the average age of a Harley rider has gone from 36 to 43. "Two-thirds of our riders are baby boomers," he said. "We have a nice bell curve going."

In a rare misreading of its market, Harley made an unsuccessful diversification move in 1986, purchasing a recreational-vehicle business. The company figured that it was bound to lose motorcycle customers as they grew older, but could retain those senior customers by switching them to a Harley-produced RV.

"That turned out to be not true," said Ziemer. "Riders want to stay on the bike," he said, well past the age they used to dismount for good. Until it shed the RV business in the mid-1990s, Harley's troubles with its Holiday Rambler RV line had kept a number of institutional investors from buying Harley shares.

To prime the pump for future sales, Harley is trying to attract younger riders through a number of programs. Among other things, it has in recent years been offering, under the Buell nameplate, a line of smaller, easier-to-drive bikes that are less costly, and less daunting, than Harley's famous hogs.

Analysts consider the modest-selling Buell line a drag on the parent's earnings, but Ziemer calls the Buell a crucial "confidence-building motorcycle" that will help develop another generation of Harley riders.

"Every aspect of the company is part of the brand-making process," he said.