Riding Harley-Davidson, Inc. (HOG)’s Customer Loyalty All the Way to the Bank

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Harley-Davidson, Inc. (NYSE:HOG)Here in Northern California, groups of Harley-Davidson, Inc. (NYSE:HOG) riders are as common as wildflowers on a country hillside.  No longer are these groups flying "colors" like Hells Angels members or full of freshly released prison immates - Harley-Davidson's are now the favored "ride" of the middle to upper class Silicon Valley professional.  On any sunny day, groups of balding, middle-aged professionals can be seen astride Harley's enjoying the scenery and open air. Last month, even the Pope blessed a similar group of Harley riders, including two company representatives.

The Demographic Challenge, and the Answer

Why then has the company's motorcycle sales fallen more than 13%, triggering a greater than 10% decline in stock price?  Many believe that Harley has a serious demographics problem, and in fact, most of its recent sales are to men between the age of 40 and 50, with those in their 60s thought to be more worried about their joints and possible broken bones than riding.  According to another Foolish Blogger,

The sweet spot is the mid-40s to early 50s.  And with the Baby Boomers—the largest and wealthiest generation in history—now largely aged out of this key demographic bracket, Harley has a serious problem.  Generation X—my generation—is not nearly large enough to pick up the slack, and Generation Y (aka “the Millennials” or “Echo Boomers”) are decades away from being in the demographic sweet spot for Harley.  The number of American men aged 40-49 is set to decline through the early 2020s and won’t reach its old 2010 peak until 2035.

How does Harley-Davidson, Inc. (NYSE:HOGplan to address this issue?  Harley has launched a massive campaign to spread awareness to the younger demographic, as well as to international markets. Also included in this outreach are African-Americans, women, and Hispanics. In response to the market's dip based on demographics, the company has launched a demographics page on its site, discussing where the numbers will come from.

This Foolish blogger believes the company will recover from this dip, but that it will dip farther in the coming months before a recovery is seen.  Is the market overreacting?  Of course!  A great time to buy will be when the stock dips below $52 - which it probably will.  This company is still very well managed, which can be seen by looking its strong ratios and financials.  Capital spending is down by almost 7% from five years ago, and gross margins are still at a healthy 43.6%.

One Alternative - Polaris

In contrast, Polaris Industries Inc. (NYSE:PII), the maker of the Victory motorcycle, has only a 1% difference in its 52-week high and low price, as compared to 8% for Harley.  Victory is starting to eat into some of Harley's margins, and is beginning to achieve some strong brand recognition in its own right. The stock is another great buy, in this Foolish blogger's opinion, as the company sells more than just motorcycles and offers the careful investor more diversity.  Polaris snowmobiles are also an American icon. YTD (year-to-date), Polaris stock has returned 14.88%.

Fools love Polaris more than Harley, too - as it sports a CAPS rating of 4/5, compared to Harley's 2/5. The dividend yield of 1.8% and a 44.8% return-on-equity are also strong indicators that this stock is a good long term play.

Yet this Foolish blogger doesn't believe that the Victory will ever significantly eat into Harley's margins, as the brand is not as iconic as Harley-Davidson, even if it is better engineered.  And both stocks are good plays for the recreation-conscious investor.

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