Analyst: Housing Sector Woes Spreading to the Garage

Publish Date: 
Aug 15, 2007
By Holly J. Wagner

POWERSPORTS industry stocks had a rocky road this week after a financial analyst report that revealed higher dealer inventories and the marketwide credit squeeze are taking a toll on powersports sales.

Bank of America Securities analyst Michael Savner sees a challenging model year ahead for Harley-Davidson (HOG) and Polaris (PII).

In a note to investor clients, Savner said broader economic woes are putting pressure on powersports manufacturers and retailers as consumers and banks tighten their purse strings.

"Our view is that powersports companies are the hardest hit by macroeconomic headwinds and are currently negatively impacted by housing market decline, higher gas prices and low consumer sentiment," he wrote. "Besides, there is maturation of domestic motorcycle markets [and] secular decline in core ATV business."

While Polaris is getting a great response to its new RZR model, that demand appears to be cannibalizing the market for older and more expensive ATVs as cost-conscious consumers move down the price scale.

"We believe the mix shift from slightly higher ASP [average selling price] products to lower, as well as lower margins for RZR could pressure near-term earnings," he wrote. "While ATV inventory seems to have improved, we are still tracking old inventory with dealers, which might pressure new model pricing."

The potential cannibalization is priced into Savner's earnings per share estimate for Polaris' third quarter; he reduced that estimate from $3.03 to $2.98 per share, attributing 4 cents of the cut to lower financial service income (HSBC recently discontinued its financing agreement for non-Polaris-based products) and a penny to RZR cannibalization.

Harley dealers, too, are stocked primarily with 2007 models, Savner wrote. He estimates dealer inventory is 12 percent higher than at the time last year; the estimated mix is 8 percent 2006 models, 79 percent 2007 models and 13 percent 2008 models.

"Our checks indicate that increased promotional levels continued in July as dealers continue to clear 2007 inventory," he wrote. "Historically, 3Q accounts for roughly 25 percent to 27 percent of yearly unit retail sales, and is the second most important quarter, 2Q being the most important."

Savner estimates H-D will ship 93,000 bikes in the third quarter, 80 percent of those to domestic dealers.

"Based on our proprietary inventory survey, we believe inventory levels remain well above optimal levels," he wrote. "Currently, we are tracking 39,496 bikes in the channel, which is up roughly 12 percent from last year but decreased from up 22 percent at the end of the second quarter of 2007."

Not surprisingly, two of the states with the most harrowing housing markets are also swimming in Harley inventory.

Savner reports that dealers in Florida averaged 106 bikes at the end of July, compared to 95 at the end of the second quarter; California dealers averaged 46 bikes compared to 39 at the end of June; and Texas dealers averaged 45 bikes vs. 38 in 2007. Inventory in the rest of the country seems to be stabilizing.

International sales are the bright spot in Savner's Harley forecast, with a projected 12 percent to 15 percent increase.

Harley faces tough comps this quarter, as the launch of the Twin V Cam 96-based models last year drove a 6.7 percent sales increase.

"While the recently launched 2008 lineup consists of some impressive new models, but it does not match up to the 2007 changes, in our view. This year Harley is introducing Softail Rocker, Sportster 1200 Nighter, Dyna-glide Fat Bob and CVO models. We believe this tough comp coupled with current domestic softness could impact sales in a seasonally strong third quarter," Savner wrote. "Overall we expect the 2008 performance should be more like model year 2006 i.e. moderate shipment increases, and lower ASP increases."

Savner lowered price targets Tuesday on Harley-Davidson stock from $64 to $62 a share with a "neutral" rating, and from $50 to $44 a share for Polaris with a "sell" rating.

Shares of Harley-Davidson opened at $55 Wednesday, and fell to $53.72 before rebounding to $54 in after-hours trading. Polaris shares opened at $45.31 and closed down at $44.97; then staged an aggressive comeback to $46.15 in after-hours trading.