topbanner ad

Tuesday 14 November 2023

Comment by Editor-in-Chief, Robin Bradley

It's Just Plain Bad Capitalism

In their own ways, this month's Harley and Polaris Q3 numbers both raise more questions about their futures than they answer. In recent months, Harley and Polaris have both seen their share prices in meltdown. 

While the stock markets as a whole (worldwide, not just in New York) have been 'soft' at best since the summer, Harley and Polaris have both seen their stock prices slide more heavily than the aggregate of the indexes they are a part of.

In the case of Polaris, its stock price has fallen from a year-high of $138.40 as recently as the end of June 2023 to trading at around $86.40 as I write this (November 2, 2023). That represents a loss of around $52.00 (37.5%) a share for each of the 56.47 million shares it has outstanding. Its market cap. has also, therefore, declined and presently sits at $4.88 bn.

As is customary, its Q3 filings were followed shortly thereafter by its regular quarterly cash dividend declaration - at $0.65 per share. That announcement also included a share repurchase program advisory, but there isn't anything unusual in that.  

What was unusual was the ambition - Polaris is to spaff away a cool billion of investment on buying back something that other people clearly are not clamouring for. 

"nightmare on Wall Street"

Polaris Chief Financial Officer Bob Mack went on to state: "As part of our 2022-2026 financial framework, we set out to repurchase at least 10% of our outstanding shares of common stock. We continue to view share repurchases as a prudent source of capital allocation and this authorization allows us to deliver on our commitment to our shareholders, while reinforcing our confidence in our longer-term strategy." 

Polaris' announcement went on to include the usual caveats - "stock repurchases will be made from time to time" and "may be executed through open market or privately negotiated transactions" and "may be suspended at any time" etc. etc., blah, blah, yada, yada.

Polaris has said that this is an open-ended authorization (in terms of there being no expiration date) and that in addition to funding it with "cash on hand" and "cash from operations," it will also use cash from "available credit facilities or other debt instruments" should it choose or need to do so. 

There is nothing unusual or illegal about this. But regardless, it is a worrisome and, in many quarters, considered a controversial and inappropriate way of funding share repurchases - which are themselves not universally well-liked even if they are alarmingly commonplace. Harley, for one, has at times used borrowings to "return value to investors."

A Billion Dollar program to repatriate ownership of 10% of its equity, at a time when it may well have to add to debt to make it happen, and when investment capital could be better spent on R&D and marketing, is high risk. 

It is, effectively, a bet on there being no major downturn in demand for powersports vehicles and no major recession. It is also a signal that the Polaris board thinks that its investors are better served by having some of their money back rather than having them try to make money out of it for them. 

Whilst corporations in this position will bask in the afterglow of being regarded as the "good guys" by Wall Street, it doesn't say much for their view of what they can achieve on "Main Street."

Meanwhile, some 350 miles southwest from its Minnesota HQ, at Milwaukee, Harley-Davidson is having its own 'Nightmare on Wall Street'. 

CEO Jochen Zeitz is basking in his own "desirability and profitability" afterglow while, Nero-like, all about him is burning down - at least as far as the stock market valuation is concerned.

Now, don't get me wrong. I am perfectly prepared to be, and hopeful that I will be, proven wrong. As it happens, I am somewhat of a 'fellow traveller' with Zeitz (long-term should be the only term that matters). I have always called out the artifice of conventional fiscal corporate valuations specifically because of the difficulty in accounting for brand value - that tricky, slippery, ephemeral concept that MBA graduates dismiss as the financial equivalent of fairies at the bottom of the garden - if it doesn't have a SKU "you can't box it, you can't shift it, you can't count it."

In Harley's case, the path to share repurchase programs and the accumulation of debt to execute them is a historically well-trodden one. 

However, in shades of Soviet era Eastern Europe and pre-state-capitalist China, what appears to be a less certain route for them is the one that takes them to the successful completion of a five-year corporate plan.

As we eye the fourth year of the Hardwire plan - the one that the Rewire determined should follow the failed 'More Roads' and its 100 new models in ten years, Harley's Q3 financials left investors just as unimpressed as prior quarters have done.

In Harley's case, its 12-month share price high came in February 2023 at around $52.00. As at the time of writing, that has dropped to the $27.00 mark. Polaris has lost 37.5% of its stock market value in four months; Harley has lost nearly 50% in eight months and has seen its market cap. plummet to $3.8 bn - making the possibility of a take-over ever greater. In a reverse of what nearly happened in 1998, how about KTM as a candidate buyer of Harley? 

There are those among AMD's readership who think I'm just a typical cynical media guy who likes nothing better than being negative and disrespectful of the hard work and (theoretically) good job that honest and sincere people do.

Nothing could be further from the truth. But what I am unapologetically negative and disrespectful about is strategies and decisions that are just plain bad capitalism. I agree the focus on profitability, but to maximize earnings by selling less is neither sustainable nor useful in the long-term.

Using scarcity to sprinkle star dust on a product is deluded. To channel Robert DeNiro - amortize that! It may well pump the bonus in the short-term, but in the long-term, it means that the legacy that dealers are paying for in the absence of a healthy inflow of investment capital, will be to leave behind less rather than more.