Harley-Davidson From The Point Of View Of The Investor.

Among many data that Wall Street analysts and investors closely track  are the various company margins. Gross margin, operating margin and net margin (see definitions at bottom of this post). If they increase or fall, they want to know why.

Healthy margins, either constant (expenses and revenues increase by the same percentage) or increasing over time, are a green light to invest in a company, especially if the numbers are superior to those of the direct competition. This chart (source Motley Fool) shows the evolution of Harley-Davidson margins during the last 5 years. Over these years, gross margin peaked at 39.7% and averaged 36.8%. Operating margin peaked at 25.8% and averaged 20.4%. Net margin peaked at 16.9% and averaged 11.8%.

But if you look at Harley-Davidson TTM Margins (Trailing 12 Months) you get the following numbers.  TTM gross margin is 33.7%. TTM operating margin is 12.1% and TTM net Margin is negative (0.50%). If you compare to Polaris Industries (All Divisions), Polaris has a lower TTM gross margin, an almost identical TTM operating margin, but a healthy TTM Margin of 7.3% versus negative 0.50% for Harley-Davidson. These numbers tend to justify all actions taken by the Motor Company to restructure by laying off, negotiating new wages with unions and closing plants.
I know that many of you still wonder why Harley-Davidson stock (HOG) goes up when it announces they layoff and/or close a plant. The costs for those workers or that plant will disappear and the reported margins should improve, assuming, of course, that revenue doesn’t drop by a proportional amount. 
Gross margin is the percentage of money left after cost of goods sold have been subtracted from revenue. The dollar amount is called gross profit.
Operating margin is the percentage of money left after operating expenses have been subtracted from gross profit. These expenses include research & development; depreciation; and selling, general, & administrative (SG&A) which includes office rent and executive salaries. The dollar amount is called operating profit.
Net margin. This is the percentage of money left after all expenses have been subtracted from revenue. Besides the above, this includes tax expense and interest expense. The dollar amount is called net profit.

9 Responses to “Harley-Davidson From The Point Of View Of The Investor.”

  1. 1 2Low Dec 14th, 2010 at 8:26 am

    This should shut the mouth of those who stated that Harley makes too much money and didn’t need to do an emergency restructuring by laying off employees and cutting costs everywhere possible.

  2. 2 Dotty Dec 14th, 2010 at 9:29 am

    I guess that 2.3 billion we loaned them did some good. for now

    Harley-Davidson took a $2.3 billion loan from a federal bank bailout program at the peak of the financial meltdown, according to documents the Federal Reserve revealed this week.
    The lion’s share of the loans went to banking entities like Citigroup, Merrill Lynch, Morgan Stanley, Wells Fargo and JPMorgan Chase. Many of the individual loans were worth billions and had short durations but were paid back and renewed many times, according to Forbes.
    The Fed released the data on more than 21,000 transactions. The disclosures are required under the financial overhaul law. The central bank disclosed details of more than $3.3 trillion in loans to financial institutions, companies and foreign central banks during the crisis. The Fed detailed more than $2 trillion it lent through eight programs from December 2007 to July this year to ease a credit crisis. The lending programs had never been used before and are now defunct. Most of the loans have been repaid and none are overdue, Fed officials say. But the bailouts angered taxpayers, who got little help with their struggles. “The American people are finally learning the incredible and jaw-dropping details of the Fed’s multi-trillion dollar bailout of Wall Street and corporate America,” said Sen. Bernie Sanders, I-Vermont, who pushed for the disclosures. “Perhaps most surprising is the huge sum that went to bail out foreign private banks and corporations.” Harley, along with companies like Caterpillar ($733 million) and McDonald’s ($203 million) used the Fed’s loans to meet immediate payments such as payroll or payments to supplies when private financing dried up.

  3. 3 Bigalyts@aol.com Dec 14th, 2010 at 9:32 am

    Good info to know and well put, Cyrill.

  4. 4 deadwood1783 Dec 14th, 2010 at 9:37 am

    The issue is that it also points out how bad upper management ran the company prior to the recession especially as compared to Polaris. Polaris had the good sense to concentrate on being a manufaturer instead of trying to become a bank. HDFS and a lot of Dealers made down right silly loans to people who had no way to pay them back going in. Just like the housing market. Not only did they make these loans to borrowers they shouldn’t have, but they sold all the back end products and financed those as well and left these loans so upside down there was no way out except to take huge losses. A short term gain which would inevitably create an unsustainable situation.This was a crash just waiting for a place to happen. Did no one take Economics 101? After tha last twenty plus years of record profits HD should have been flush with working capital if upper management hadn’t squandered it. Its cetainly not all labors fault. Take a look at the pay, and stock options, and bonuses upper management took during the boom years. You can’t carry all the profits home folks. All businesses must plan for recessions. If you don’t think hard times is a part of the business cycle, you might as well take down your sign and go home. Recessions have always been a part of the business cycle and always will be. Hopefully this lesson has been learned by all.

  5. 5 Gerry Dec 14th, 2010 at 9:40 am

    Very interesting data, Cyril. Very good comment Deadwood. I agree.

  6. 6 ron Dec 15th, 2010 at 4:04 am

    Dead on deadwood

  7. 7 Wiz Dec 15th, 2010 at 10:14 am

    Hey Uncle Sam, I could use a cuppola mill to meet my payroll requirements, stock options, CEO [me] bonuses, gold-plated faucets in the crapper ‘an such. ‘Cmon, I’ve been strugglin’! Wiz

  8. 8 mad Dec 20th, 2010 at 11:16 pm

    Deadwood1783 is right. I worked there & saw the constant bad decisions that upper management made. Excellent employees were laid off due to these bad decisions made by upper management. Amazing & sad that the people who made these bad decisions were able to keep their jobs.

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Cyril Huze