Excerpts of Nov 16th 2013 Economist Article on Political Resistance to Helmets

Biking without a helmet...No brainer    During the 2013 legislative session, 19 bills were introduced in 11 states to repeal all-rider helmet laws. None passed. Appeals to thrift can take some of the credit. For years, helmet-advocates stressed human suffering when giving evidence to state legislatures. Now they also stress costs to taxpayers. Libertarians often demand: “Let those who ride decide,” says Jacqueline Gillan, who heads Advocates for Highway and Auto Safety, an insurer-funded lobby group. Her retort is: “Let those who pay have a say.”

When states repeal or weaken motorcycle-helmet laws, as dozens have, helmet use falls, fatalities rise and head-injury hospitalisations soar. Biker deaths rose 18% after Michigan repealed its all-rider helmet law in 2012. A rule obliges unhelmeted Michigan riders to carry at least $20,000 in medical-payments coverage. That does not even cover initial stabilisation in intensive care after a nasty crash... Deaths-per-bike-mile rose 25% when Texas scrapped helmets, for instance. In Washington Tom Petri, the Republican chairman of the House of Representatives committee that oversees highways, wants the CDC to stop researching motorcycle safety. The agency seems to have “an anti-motorcycle agenda”, he growls. Asked about accidents involving the helmetless, he says: “I don’t think there’s that clear a correlation.”

Harley-Davidson: A Luxury Company

To assert that Harley-Davidson should be understood as a company that sells luxury items is to make an surprising claim for a company that has always played the populist card. However, as the company’s marketing is primarily based on presenting customers with the opportunity to display ownership of a product with a unique history and mystique the company has met the primary characteristic of a luxury brand. The company is certainly aware of this as can be seen by their exploitation of a product with a long-standing and unchanging sound, design and iconography. In addition, the company is always reinforcing the aspects of the motorcycles that create and preserve an emotional connection to the brand. Notably, Harley-Davidson does not primarily compete in the areas of product quality and technical engineering.

Two definitions of luxury as “something inessential but conducive to pleasure and comfort” and something expensive fit the company’s motorcycles. In fact, although I would argue that the public display is the dominant value that Harley ownership provides; other luxury attributes are also present in Harley products. For example luxury brands (e.g. airplanes, yachts, etc.) may have a group that is exclusive to owners. So we have the Harley Owners Club, similar to the Rolls-Royce Enthusiasts' Club, both sharing a penchant for anniversary celebrations, historical memorabilia and owner and museum collections. Also, Harley-Davidson’s use of limited editions, special series, but especially customization as a way to build a sense of exclusivity is standard fare for luxury products such as watches and sports cars.

Another attribute of luxury brands is a non-utilitarian focus. With the company’s bikes it is sufficient to merely own one and use it occasionally for social events. Whether diamonds or motorcycles, function can take a back seat to mystique.

Where Harley has a problem as a luxury brand is in the creation of scarcity, that distinctive feature of many luxury goods. In the early 2000’s the company could not keep up with demand and the wait for delivery became part of the experience. Now, however, the factory is not running at capacity and the company would love to bring scarcity back as part of the brand. Although this would eventually dilute the brand (imagine Harleys everywhere), unfortunately customers have become as scarce as bikes were ten years ago.

How should investors value such a company that makes luxury goods to a slowly declining customer base? If we factor out any prospects for growth the company’s value is very sensitive to P/E, borrowing costs, discount rate and free cash flow projections but my current estimate is that somewhere in the range of $25-$30 for 2015. After that, we shall see.

Idea Mechanic Report: Analysis of Harley-Davidson's Latest 10-Q

CLICK HERE for the latest H-D Report

CLICK HERE for the October H-D report.

An Aging Company Selling an Aging Product Tries Again to Broaden its Appeal.

Harley-Davidson announced the other day that they would make another attempt to attract a few customers from their rivals, e.g. Honda, Suzuki, Yamaha, BMW etc. The super-heavyweight bikes that H-D sells are facing a declining customer base, particularly for new bikes (between dealers, E-bay, craigslist, etc. there are hundreds of thousands of used Harley's for sale).  So, management has decided to try to sell a "lighter" bike (“These new bikes are leaner, yet still have a mean streak,” Mark Hans Richer, a senior vice president at Harley-Davidson, said in a statement. “They’re the real deal, made of real steel.”)

This attempt to attract a new customer base was tried before: in 1998, the Buell Motorcycle Company became a wholly-owned H-D subsidiary. This infusion of technology allowed H-D management to bring out the Buell Blast in 2000. It was, at 360 lbs and with a 492 cc engine, management's idea of an entry-level training bike and was used in H-D's "Rider's Edge" rider instruction schools.  However, the Blast (and other Buell models) never sold that well and under the cover of the 2008 financial crisis, in late 2009, Harley management shut Buell down. In a rare show of humor, H-D released an ad in July 2009, showing a Blast destroyed by an automobile crusher.

Yet this 10 year Blast experiment (selling a lighter, sportier bike for first-time purchasers) is now going to be repeated with the Street 500 and Street 750 models. Before marketing even begins, one  obvious problem with this approach is that a 500cc bike is too powerful for beginners...so who is going to buy it - certainly not riders in the market for the more sophisticated Japanese models. And it's unlikely that this bike can find much traction in the already mature Indian motorcycle and scooter market.

Redline of last two 10-Q's from Harley-Davidson

Here's a comparison of the company's last two 10-Q's. The red lines show the deletes and the blue text is new.

https://drive.google.com/file/d/0B4T33oZTuT6CcmFiVGx6N0pQcG8/edit?usp=sharing

The Blind Spot that Harley-Davidson exploits is closing.

Harley-Davidson, in an act of branding that bears comparison with Philip Morris's Marlboro man, has, for decades, sold the idea that a simpler, more real existence can be lived on the back of a heavy motorcycle. By riding a Harley, the advertising suggests, consumers can share in a collective dream of rugged individualism lived on the open road. Yet, long after the hazards of smoking were public knowledge, the Marlboro ads were directly responsible for selling billions of cigarettes that contributed to the deaths of millions of people . These exercises in branding are so successful because as President Reagan said: “Americans believed about the West not so much what was true, but what they thought ought to be true.” 

Unfortunately, for all the joys of riding an adult version of a kid's bike with playing cards snapping in the spokes, heavy bikes are really very unsafe. The fatality rate is 30 times that of automobiles and heavyweight bikes and superbikes are arguably the most dangerous vehicles on the road. Yet, health and safety issues are largely ignored by the industry. This is partly because the ethos of the heavy motorcycle use includes an explicit hyper-individualism, a value that makes issues of health and safety irrelevant.  Of the potentially 1,000 people that will die riding Harley-Davidson motorcycles this year many share either a magical sense of invulnerability or a fatalistic approach to safety that includes resistance to helmet wearing. 

For others, heavy bikes are assumed to be as safe as cars which over the last fifty years have benefited from greatly improved safety design and engineering. The primacy of the driver for car safety issues (reflected in the excitement surrounding the development of the driver-less car) disappears when the discussion turns to motorcycle safety. Fortunately, a decline in the emotional significance of car driving for young adult males will slowly translate into lower super-heavyweight bike sales for H-D.  

Although we cannot know in advance who will die in motorcycle accidents each year, we can predict that approximately 4,600 people will do so, no matter how avoidable each of those crashes may be understood to have been. Yet the only real pro-safety action by industry groups has been the marketing of remedial-level rider courses. 

Groups involved with dangerous products, such as the NRA and the tobacco industry, have historically spent millions of dollars to keep regulation to a minimum.  For motorcycles, much of the battle has been fought around helmet laws. A safety device that would save hundreds or thousands of lives annually has been portrayed as an annoying intrusion into the free-spirited existence of motorcycle riders and motorcycle related head injuries and fatalities continue to be portrayed as mere side-effects of motorcycle use. 

The industry continues to rely on consumers ignoring the safety risks built into the design of a heavy or super-heavyweight motorcycles. Fortunately for Harley, there is just no way that consumers can test the crash characteristics of heavy bikes. 

A short version of Risk Factors from their H-D's latest10-K

There is no assurance that the Company will be able to grow.

Translation: women and residents of Mumbai may never buy an 800-lb motorcycle.

Company must protect its intellectual property from imitators by making product advancements while maintaining the classic look, sound and feel….

Translation: Any suggestions from customers would be welcome because we’ve run out of ideas. (see Rushmore)

The Company must detect issues with the Company's motorcycles or manufacturing processes to avoid recall campaigns, increased warranty costs or litigation, and delays in new model launches.

Translation: The recent 29,000 bike recall is hopefully not a sign of quality issues.  

If the Company's credit ratings are downgraded or its ratings outlook is negatively changed, the Company's cost of borrowing will increase, resulting in reduced earnings and interest margins, or the Company's access to capital may be disrupted or impaired.

Translation:  Keep S&P, Moody, and Fitch analysts happy.

The Bureau of Consumer Financial Protection ("CFPB"), has been granted significant enforcement and rule-making authority in the area of consumer financial products and services… Compliance may create operational constraints and place limits on pricing.

Translation:  We love getting 20+% interest but those days may be numbered.  

Many of the Company's competitors are more diversified than the Company... Also, the Company's manufacturer's suggested retail price for its motorcycles is generally higher than its competitors.

Translation:  Our competitors are bigger and richer and their bikes are cheaper.

The Company's current and future total compensation arrangements… may not be successful in attracting new employees and retaining and motivating the Company's existing employees.

Translation:  Cutting labor costs may cause quality issues. (see the recall)

The Company manufactures products that create exposure to product liability claims and litigation.

Translation:  Nobody has blamed us so far, but they sure could.  

Further, shipping products with poor quality may also adversely affect the Company's reputation.

Translation:  May???