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Tuesday, 23 June 2015

Comment by Editor-in-Chief, Robin Bradley

If you want a scary story, read between the lines of Harley's share price performance

FOR about nine months now I've been writing about the Motor Company's softening sales profile, its fiscal position, the impact both have been having on their share price, and the possible implications on their independence.

I have been writing-up reports on Harley-Davidson's quarterly results since September 1993, so I guess in that time I have gotten pretty well attuned to the nuances of their reporting.

After a while you become pretty familiar with what can be gleaned between the lines - not so much between the lines of their press release text, as that is pretty meaningless BS at the best of times anyway, but between the lines of the numbers they release.

From the dangerously low ebb of 2009 when sales and share price had both gone into melt-down, Harley's balance sheet management had been astute - even if question marks remain about the long-term wisdom of some of the decisions taken.

Following the Project Rushmore model announcements in 2013 Harley's share price had recovered by April 2014 to around the same mid $70 territory seen at its pre-recessionary peak.

However, unlike their increasingly competitive rival Polaris Industries, whose sales and share price cycle very closely mirrored Harley's own from 2009 to 2013, Harley has not managed to kick-on from there.

As discussed in our quarterly Harley fiscal review on page 14 of this edition of AMD Magazine, the past twelve to fifteen months have seen the company's progress grind to a halt and then go into reverse.

To describe this as a "worry" is an understatement of massive proportions. It would appear that Mr Wandell's retirement has been well timed and that his successor Matt Levatich is going to see some of the outcomes of the 2009 - 2013 strategy materialize on his watch.

Harley has kept the dividend it pays to its investors high, in order to keep them "on-side". Indeed this year's increase sees it at its second highest level ever. Unfortunately, just as the Project Rushmore MY2014 initiative appears to have failed to sustain dealer consumer traffic, the dividend, of itself, appears to have failed to sustain the share price.

The decline in new model sales seen in the final quarter of last year and since has been followed by a (albeit modest) loss of market share in the first quarter of this year that would be described as a recession if Harley was a country - two consecutive quarters of "negative growth".

The impact on the share price has been dramatic. As dictated by its market capitalization, Harley-Davidson has lost at least 25 percent of the market value it had achieved in little over a year. In fact, it lost something in the order of 10 percent of that in just four months this year.

So the question "where is this headed" is now becoming an urgent one for Harley. The increasing vulnerability that I have been pointing to in the past six months or so is now beginning to look like an object in a rear view mirror - larger than it appears.

Urgent and larger than it appears because unless Harley can come up with a convincing fix in metal as well as balance sheet, the 21st century breed of aggressively active investor could, sooner or later, see Harley settle firmly into the cross-hairs of a target-hungry mergers and acquisitions culture that currently has capital reserves aplenty.

In fact, equity investors are probably now also likely to be 'in-play', and it may well be that disappointingly low though it already is, Harley's share price may already be being artificially inflated by an element of premium as investors lick their lips at the prospect of an attractive pay-day ahead as one or more contenders seek to do business.

This may be a dangerous hostage to fortune, but it is unlikely that anything much will happen quite yet. In all probability Harley has time to see what benefit it can accrue from an MY2016 launch in August that will be watched closely.

If the Company at least manages to avoid much more atrophy in its market value between now and the release of its 2015 fiscals eight months from now, then perhaps it still has enough wiggle room to shore-up its platform with some platform progress (so-to-speak!).

Should it fail to do so, then there is only so much vulnerability it or any publically traded multi-billion Dollar corporation can get away with.

One stunning wild card possibility could be a play for the Motor Company by the hugely acquisitive Polaris. While that would be a sensational and ambitious move, if Harley isn't able to give its share price the kiss-of-life at some stage in the next 24 months, then that, and all points leading to that extreme outcome, are the outcomes that Matt Levatich could find will end up defining his time as CEO.