{"id":39335,"date":"2013-06-26T16:37:47","date_gmt":"2013-06-26T20:37:47","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=39335"},"modified":"2013-06-26T16:37:47","modified_gmt":"2013-06-26T20:37:47","slug":"harley-davidsons-flat-tire-demographics","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/06\/26\/harley-davidsons-flat-tire-demographics\/","title":{"rendered":"Harley-Davidson\u2019s Flat Tire: Demographics"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

Harley-Davidson, Inc. ($<\/span>HOG<\/a>)<\/b> is an American icon.\u00a0 It\u2019s also a well-managed company and one of those true rarities: a successful turnaround story.\u00a0 This is a company that was facing bankruptcy in the early 1980s yet managed to rebuild itself into the pride of American manufacturing\u2026and the subject of countless case studies in MBA programs worldwide.<\/p>\n

Harley\u2019s management was able to pull off that coup by leveraging that intangible quality that is so hard to imitate: brand cachet.\u00a0 For a particular breed of leather-wearing motorcycle enthusiast, there is simply nothing on par with a Harley.<\/p>\n

But all of that said, I wouldn\u2019t touch the stock, or at least not at today\u2019s prices.<\/p>\n

At first glance Harley wouldn\u2019t appear exceptionally pricey.\u00a0 It trades for 17 times trailing earnings and 2 times sales.\u00a0 This compares to 16 times earnings and 1.5 times sales for the S&P 500.<\/p>\n

A modest premium is appropriate for an iconic company with Harley\u2019s branding power (and not to mention its high return on equity of 25.8%), right?<\/p>\n

Well, maybe.\u00a0 But Daimler ($<\/span>DDAIF<\/a>)<\/b>\u2014a company that knows a thing or two about vehicle branding\u2014trades for just 10 times earnings and 0.42 times sales.\u00a0 Yes, I realize it\u2019s not an apples-to-apples comparison and that Harley runs a higher-margin operation in a business with fewer direct competitors.\u00a0 All else equal, Harley should trade at a slight premium to a larger automaker like Daimler.<\/p>\n

But all else is not <\/i>equal, and Harley has a serious growth problem.\u00a0 And it\u2019s not one that will go away with a recovering economy.<\/p>\n

\u00a0\"chart\"<\/a><\/p>\n

\u00a0Harley\u2019s revenues are still below their pre-crisis highs (see chart).\u00a0 Unit sales paint an even bleaker picture.\u00a0 Harley sold 349,196 bikes in 2006; the number in 2012 was just 247,625.\u00a0 That\u2019s a unit decrease of nearly 30%.<\/p>\n

To be fair, revenues and unit sales have enjoyed a nice bounce since the pits of the financial crisis.\u00a0 But Harley will never get its old mojo back for one critical reason that is completely outside the control of management: demographics.<\/p>\n

Down the road from my house in Dallas, there is greasy drive-in burger joint called Keller\u2019s\u2026a place I\u2019ve been known to frequent a little more often than my doctor might recommend.\u00a0 On any given weekend, you might see a dozen or more bikers parked in the lot, showing off their chrome-laden Harleys.\u00a0 And nearly all of them are over the age of 45. Most are over 50.<\/p>\n

This isn\u2019t a coincidence.\u00a0 Harley Davidson is a brand whose sales depend disproportionately\u2014for that matter, almost exclusively\u2014on middle-aged Caucasian males.\u00a0 Riders younger than 40 generally lack the time, interest, or the bankroll to buy a Harley.\u00a0 But by the time they get into their 60s or older, the noise and joint pain have begun to make riding lose its allure.\u00a0 You may still ride in your 60s, but you\u2019re doing it less frequently and you probably aren\u2019t buying a new bike.<\/p>\n

\u00a0\"American<\/a><\/p>\n

The sweet spot is the mid-40s to early 50s.\u00a0 And with the Baby Boomers\u2014the largest and wealthiest generation in history\u2014now largely aged out of this key demographic bracket, Harley has a serious problem.\u00a0 Generation X\u2014my generation\u2014is not nearly large enough to pick up the slack, and Generation Y (aka \u201cthe Millennials\u201d or \u201cEcho Boomers\u201d) are decades away from being in the demographic sweet spot for Harley.\u00a0 The number of American men aged 40-49 is set to decline through the early 2020s and won\u2019t reach its old 2010 peak until 2035.<\/p>\n

CNN Money<\/a> reported on this as far back as 2010, and demographic strategist Harry Dent\u2014my old boss\u2014has used Harley as a case study for decades.<\/p>\n

Harley Davidson\u2019s management is not stupid.\u00a0 They understand the issues they face, and they have gone so far as to address it with a dedicated page on their Investor Relations site: Harley Davidson Demographics<\/a>.\u00a0 The company has aggressively expanded its marketing efforts to attract younger men, non-Caucasian men, and women and has had modest success.\u00a0 Per the demographic site, management writes \u201cIn 2012, U.S. sales of new Harley-Davidson motorcycles to our \u2018outreach\u2019 customers — young adults 18-34, women, African-Americans and Hispanics \u2013 grew overall at more than twice the rate as sales to our traditional U.S. customer base of Caucasian men, ages 35-plus.\u201d<\/i><\/p>\n

But realistically, there is no replacing the white Boomer male.\u00a0 And this means a very rough decade ahead for Harley Davidson.<\/p>\n

Stocks in industries in gentle decline are not necessarily bad investments, as tobacco stock investors have no doubt noticed (see \u201cMy Favorite Tobacco Stock is\u2026Intel?<\/a>\u201d and \u201cCan E-Cigarettes Relight Big Tobacco<\/a>\u201d).<\/p>\n

Under the right set of circumstances\u2014strong financial health, large barriers to entry, good dividend growth and share buybacks\u2014stocks in no-growth industries can make better investments than those in high-growth industries.<\/p>\n

But for this to be the case, the stock has to be priced appropriately.\u00a0 Big Tobacco has had a great decade-long run because it started out cheap and hated and paid a monster dividend.\u00a0 Harley Davidson, in contrast, trades at a slight premium to the market and yields only 1.7%.<\/p>\n

Harley Davidson may be a good buy\u2014eventually. But given the demographic headwinds it faces, it\u2019s not cheap enough for serious consideration at this time.<\/p>\n

Diclosures: Sizemore Capital is long Daimler. This article first appeared on InvestorPlace<\/a>.<\/p>\n

SUBSCRIBE\u00a0<\/a><\/strong>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

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