Founded in Milwaukee just after the turn of the 20th century, Harley-Davidson (NYSE:HOG) has a long history of ups and downs.
It was one of only two major American motorcycle shops to survive the Great Depression, and it became a manufacturing powerhouse thanks to military contracts for motorcycles used in both World Wars. But in the post-war years, the company again fell on hard times, first because of “biker gang” image problems in the 1970s, then thanks to Japanese competition in the 1980s. In the 1990s, Harley stormed back as wealthy baby boomers took to the open road – but then the financial crisis caused a sharp decline in the sale of high-priced toys like Harley-Davidson bikes.
Now it appears Harley might be accelerating to top speed once more, with a report that shows profits more than doubled at the motorcycle maker last quarter.
Harley reported second-quarter profits of over $190 million, up from $71 million in 2010. This blew away forecasts from Wall Street experts, who were looking for about $170 million in profits.
As a result, Harley stock seems to be going hog wild today. At the start of trading, the stock gapped up about 10% at the opening bell.
The reason for Harley-Davidson’s success, on the surface, appears to be Harley’s first U.S. sales increase in more than four years. Motorcycle and related product revenues jumped 18% in the latest report, and U.S. retail sales of new motorcycles grew 7.5% to 53,599 bikes. Globally, sales also were strong, rising 5.6%
But a relatively modest sales increase alone can’t cause profits to double. The resurgence of Harley shares comes largely because of dramatic cost cuts and restructuring. There were rumors in recent years that Harley would leave Wisconsin and close operations in Milwaukee and nearby Tomahawk, taking more than 1,000 manufacturing jobs elsewhere. Harley decided to stick around, but the decision came with concessions from unionized employees and the loss of a few hundred jobs. The surge is proof that the company has “right-sized” itself for the current climate.
As a result, HOG stock has been on the rebound in the past year as all these efficiencies have taken shape, with Harley shares nearly doubling in the past 12 months after today’s big move. Much of those gains have come very recently, with Harley-Davidson stock up 30% in about a month.
There are those who would contend Harley played hardball with its workers to squeeze out extra profits. Maybe. But annual revenue for 2011 still is forecast to be off about 15% from Harley’s 2007 numbers – and the company’s profits are forecast to be about half of the earnings tallied in 2007. And with economic uncertainty still looming, it’s unlikely Harley ever will get back to those 2007 numbers anytime soon.
But in the short term, shareholders and Harley riders can take comfort in the fact their brand is soundly profitable and could be revving up for continued success in 2011 and beyond.
