Harley-Davidson attracts another old man
Today's Financial News - Posted February 3, 2009
Harley-Davidson (NYSE:HOG) needs to attract a younger generation of riders, yet all it can find is white-haired, old rich guys, like Warren Buffett. Can his money save a Hog from slaughter?
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): For the last two decades, Harley-Davidson (NYSE:HOG) has been known as the brand with the ability to turn stodgy, old men into leather-clad rebels. The more expensive bike a guy buys and the more chrome he bolts to it, the cooler he is. It does not matter if he spends 60 hours each week working as a patent lawyer or tax account, if he rides a Hog, he is part of a special cult.
As of today, Warren Buffet, the stodgiest of them all is the leader of the pack. Instead of shelling out thirty grand for a tricked out Fat Boy, he cut a check for $300 million to keep the failing bike maker in business.
Instead of a leather jacket and the right to walk, without fear, into the slimiest bars in town, Buffet will get a 15% interest payment for allowing Harley to use his money to loan to Harley buyers. Each year, Buffet’s Berkshire Hathaway (NYSE:BRK.A) will receive $45 million in payout from the senior unsecured notes.
With the near-collapse of the global credit market, Harley’s lending arm has run into the same problems plaguing Detroit and much of the world’s major manufacturers. Earlier this month, a senator from Pennsylvania asked the FDIC to back the company’s loans, but Harley took the matter to the free markets, like a true American company should.
With today’s $600 million cash infusion, created through equal investments by Buffet and Davis Selected Advisors, Harley can once again open its lending to customers. The 15% interest rate is absurdly high, but it is better than the alternative… not selling bikes.
Wall Street loves today’s news, as it sent shares of Harley up by as much as 20% throughout the day, the largest intra-day surge in twenty years.
Hogs don’t run far
As an avid Harley fan, I wish I could tell you this news will mark the company’s long-term turnaround, but there is no way I can argue the point. In fact, it serves to punctuate the company’s problems.
With borrowing costs stretching well into double-digit territory, this newly issued debt signals Harley comes with plenty of risk. Over the next few years, the company must find a way to re-image its powerful brand and bring a new generation of bikers to its products.
So far, it is has been unsuccessful and no genuine solution is anywhere on the horizon. Warren Buffett may be able to profit from this deal, but few other investors will.
Take today’s surge in price to get out of any shares of the company you still own or, even better, take advantage of the inflated prices and enter a short position. Once the market realizes the full cost of this debt, it will take a major chunk out of this hog’s share price. You do not want to be long when it happens.
Harley needs to attract a younger generation of riders, yet all it can find is white-haired, old rich guys. I cannot wait to see if Buffett gets a new tattoo.
Next Article: Some pig! And a leveraged play on bad banks
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