Harley Davidson (HOG) reported 2nd quarter earnings before the open this morning, and while the stock is rallying powerfully today big problems are lurking beneath the surface. Worldwide retail sales of Harleys decreased 30% compared to the year ago period resulting in a 27% decrease in revenues.
Even more worrying, Harley is taking on increased risk on its balance sheet as it has been unable to sell its securitized motorcycle loans to investors since the 1st quarter of 2008. Finance receivables held on Harley’s balance sheet, the motorcycle loans, have grown from $3.2 billion at the end of 1Q2008 to $5.1 billion at the end of the current quarter. This has been made possible by increasing debt from $2.1 billion to $4.7 billion.
Harley is playing a dangerous game here. Unable to sell the loans it makes to its customers to investors, it has elected to continue making these loans at a high rate, finance them by debt, and hold them as investments on its own balance sheet. Should these loans perform poorly, Harley is now on the line to suffer a lot more of the losses.
In fact, it looks like they started to realize their course was unsustainable as finance receivables did not grow in the just completed quarter. My guess is they reigned in the financing they offer to customers and that is a big reason sales dropped so precipitously.
If this is right and the plug has been pulled on company provided financing, expect Harley sales to continue to drop in the 30% range over the next year or so. That should mean a declining stock price as well.
Disclosure: Top Gun has no position in Harley Davidson (HOG) shares – but I’d short ’em if I could find some supply.