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U.S. Manufacturing Stocks: Going “Hog” Wild for a Recession

Posted January 4, 2008

‘Most analysts wrongly gauged the company by its domestic sales growth. American sales account for some 80% of the company’s business, but overseas is where the real revenue growth will take place. International sales are expected to grow by 50% during the next five years. ’ – Andrew Snyder 

By Andrew Snyder 

Baltimore (TFN)– The scene was reminiscent of the Great Depression.  The whistle blew and hundreds of tired, grimy workers punched the time clock and walked through the iron gate in a cloud of confusion and nervousness about their jobs. 

Inside the gate, strewn across the manufacturing floor, hundreds of parts and products remained half assembled now gathering dust with their futures in jeopardy.  With nobody willing to shell out the cash for a finished product, there was no reason to continue manufacturing.  

The factory would remain shutdown until orders picked up, no matter how many employees were left out of work.  If the economic slowdown turned out to be a temporary speed bump, the workers would be turning ratchets and loading trucks at the factory in no time.  If the recession lingered, the factory may never come alive with the sounds of workers and manufacturing again. As the time cards fell and gathered on the floor, so did the hopes of hundreds of loyal employees.

Laid off – Laid to rest 

It did not make major headlines anywhere but in a few small manufacturing towns, but the above scene was recently played on Harley Davidson’s (HOG:NYSE) center stage.  In late November, the company forced 5,400 hundred workers to take an unpaid leave thanks to a lack of demand for its products.  Was it foreshadowing of times to come?

With a housing market slump, a credit slowdown, a significant dip in consumer sentiment, and record-high oil prices, typical Hog owners are low on discretionary cash, say analysts.  Domestic sales have slumped, proving their point.   

I recently had a chance to chat with a Harley employee close to the situation.  “Sales were brisk for the last few years.  We worked our tails off to ship nearly 350,000 bikes last year,” he said.  “But now, there are unfinished bikes sitting on the floor.  People are canceling their orders. Nobody is buying.”

The same is true for the company’s stock.  Shares of Harley have dropped nearly 40% over the last year.  Analysts and investors are knocking the stock because of its heavy dependence on a booming economy.  If the economy is not strong, they say, firms like Harley that depend on discretionary income will be hurt the most. 

Digging through the Bargain Bin

But now that the company has lost nearly half of its market cap, smart investors are taking a closer look at the mega-brand’s true value.  With a P/E of just 11.6 (well below the S&P average of 15), shares are looking downright cheap. 

Many analysts believe a share’s price should be somewhere around 17 times its cut of the annual earnings.  With 2008’s earnings estimate of about $3.72 per share, that valuation would give the stock a price of about $63.25, well above the $45 shares are currently selling for. 

Most analysts wrongly gauged the company by its domestic sales growth.  American sales account for some 80% of the company’s business, but overseas is where the real revenue growth will take place.  International sales are expected to grow by 50% during the next five years. 

In the first three quarters of 2007, domestic bike sales dropped by nearly 5%.  Meanwhile international sales surged by nearly 14%.  Even better, a weakening dollar adds to overseas profits.  A strong Euro will significantly bolster profits from European sales. 

At that price, I’ll take 37 million

A handful of smart analysts are not the only folks working to increase their ownership in the company.  The company is spending huge amounts of money to buy back its shares.  In 2007, Harley repurchased 17 million shares, spending over a billion dollars.  On December 14, the company’s directors approved another 20-million share buyback with no price or time limit.  Right now, the company has less than 250 million shares outstanding. 

As the markets begin to squeeze out overpriced and over-hyped stocks, and as the nation’s economy slows, smart investors will turn to value investing.  It is the brick and mortar that has supplied the foundation for the nation’s best investors. 

Yes, the economy is slowing.  No, it will not be as dire as so many over-hyped media stories have portrayed.  Thanks to a general overreaction, investors are left with a great buying opportunity.

I say Harley’s downturn will not be nearly as dramatic as most anticipate.  Sure, some of its core market will be squeezed for cash, but few baby boomers (Harley’s latest target market) are impacted by the housing market slump.  Even better, the company’s slow, but steady, introduction into the booming Asian economy will give revenues an added boost. 

One of the nation’s most recognized brands has seen its value drop by nearly 40%. In a year that will likely drag most portfolios into the red, this is an opportunity for investors to lock in significant double-digit gains, with very little risk. 

History has shown Harley Davidson is one of the first and hardest hit as soon as signs of recession rise above the horizon.  Each time, it sets up a great profit opportunity for smart value investors. 

If you are looking for a safe investment going into the teeth of a moderate recession, take a good look at Harley Davidson.  You just may be going hog wild this time next year. 


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Posted by Andrew Snyder · Filed Under US Stocks and Markets 

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