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Mathew Ingram

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Let it roll

Mathew Ingram


TORONTO (GlobeinvestorGOLD) — What springs to mind when you see a highway stretching out into the distance on a summer afternoon? For many, it's a picture of themselves on a motorcycle — preferably a Harley-Davidson, the machine of choice for North America's weekend road warriors. But is the company's stock as worthwhile a purchase as one of its classic Soft Tail hogs? That all depends on what you're looking for.

One thing is for sure: shares of Harley-Davidson Inc. are substantially cheaper now than they were just a couple of months ago. Why? Because the company hit the equivalent of a monster pothole in early April, and the stock went into a skid. The motorcycle maker lost more than 17 per cent of its value in a single day — its biggest drop in about 14 years — after chief executive officer Jeff Bleustein said that revenue would likely not hit the company's earlier forecasts.

Although Harley beat analysts' profit targets for the first quarter and saw its sales rise by 5 per cent, investors seemed more interested in the fact that Mr. Bleustein said the U.S. motorcycle was essentially flat, and that Harley planned to cut its production by about 3 per cent in 2005. The CEO — who has since stepped aside in favour of former chief financial officer James Ziemer — also said that the company likely would not hit its goal of making 400,000 motorcycles in 2007.

So does that mean the glory days for Harley-Davidson passed into history? Hardly. The market's dramatic selloff in April was a typical knee-jerk reaction to an unpleasant surprise, not a sign of imminent disaster at the motorcycle company. While it's true that growth seems to have slowed somewhat from the rate investors and analysts have come to expect, there is nothing fundamentally wrong with the motorcycle business. Is demand slowing? Yes, and Harley will have to find ways of dealing with that. But it is far from a disaster.

One of the issues for the company is that the "baby boomer" demographic is aging, and isn't quite the hot-spot for motorcycle demand that it used to be. For the past decade or so, Harley-Davidson has had a stranglehold on much of that market, with its memories of iconic films such as Easy Rider and The Wild Bunch. Now, Harley is having to try and reach out to younger buyers, many of whom have grown used to riding Yamahas and Hondas, and that means reconfiguring some of the company's model lines.

At the same time, however, there's no question that the Harley name and image continue to have pull. Brokerage firm Ryan Beck & Co. said in a report that the company's brand equity "is nearly unparalleled." The firm also said that it believes motorcycle riding has become more mainstream, and that Harley-Davidson has the potential to expand its ridership substantially. And with an average age of about 47, even Harley's core customer base has room to continue buying the company's motorcycles before they are ready for a retirement home.

According to A.G. Edwards, the company's recent outlook was a disappointment, but Harley-Davidson still has the potential to produce 10 to 12-per-cent profit growth over the next year, and that justifies buying the stock — although the firm cut its target to $55 (U.S.) from the previous estimate of $71. The motorcycle maker has good cash flow, A.G. Edwards pointed out, as well as more than $1.4-billion in cash on hand. Several analysts have also said that they believe incoming CEO James Ziemer — who worked his way up from freight elevator operator — has a sound growth plan for the company.

Growing at rates in the high single digits or low teens might not seem like much to those who have watched Harley-Davidson over the past five or six years, but only because the motorcycle maker has spent much of that period at the centre of a perfect storm of positive events: the growing affluence of its largest customer base, the rise in spending power of the North American consumer in general, low interest rates, and so on. But a company that can generate steady profit growth of 10 per cent or so is still a worthwhile investment, even if it isn't quite as thrilling.

Harley has also boosted its dividend by almost 30 per cent and plans to double its stock-buyback program, both of which are likely to add some juice to the stock. So if you're looking for a high-speed, white-knuckle ride to the top of the stock charts, Harley-Davidson probably isn't going to fit your profile. But if you're interested in a slower, more comfortable ride — like the one you might get on a classic Soft Tail Harley — then the motorcycle maker's shares might not be such a bad choice.

Mathew Ingram joined The Globe and Mail's online news team in June of 2000, after spending four years as the Western business columnist, based in Calgary.

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