Given the stellar performance of Harley-Davidson (NYSE: HOG) - the stock is up a whopping 300% over the past five years, 40% in the last year alone - you'd think the iconic motorcycle maker is firing on all cylinders.
But just as a motorcycle can be going 90 miles per hour right before it runs out of gas, Harley-Davidson stock looks like it doesn't have much farther to go.
Certainly, Harley-Davidson's recent results were gleaming.
Its latest quarterly earnings report showed consolidated revenue up 7.5% to $1.34 billion, net income improving to $162.7 million (an increase of 21.4%), and earnings rising to $0.73 per share, up 23.7% from the year-ago quarter.
And Harley-Davidson says it will deliver 4.5% to 6.5% more motorcycles this year than they did in 2012.
I'm not so sure.
What the Milwaukee-based company hopes will drive this increase is a new crop of motorcycles that fall under the banner "Project Rushmore" - what is considered Harley's largest new model launch in its 110-year history.
This bold project features a slew of new advancements, technologies, and styles that will, the company says, "fundamentally transform the touring motorcyclist's experience."
All well and good, but who's going to buy these new motorcycles?
How Demographics Will Slow Harley-Davidson (NYSE: HOG)
First we need to look at who buys the company's machines now.
The image of a Harley rider is that of a rebel outsider who bends the social norms - the prototypical bad-boy image. This image is portrayed often in pop culture - for example, in the highly acclaimed television show, "Sons of Anarchy."
But did you realize that in reality the typical rider is an affluent 47-year-old white male who rides on the occasional Sunday? And that the median household annual income of the average Harley owner is $90,000, with more than a third of them having a college degree?
Harley-Davidson definitely did. The company has done a great job targeting this group. At the peak of its sales in 2006, Harley-Davidson delivered 273,000 new motorcycles to the U.S. market.
But the tide has already begun to turn. In 2012, the company sold just 160,000 motorcycles.
What's going on?
The problem now is that Harley-Davidson's target demographic is slowly fading away - and from two different flanks.
First, that 47-year old typical Harley buyer is growing older along with his fellow Baby Boomers. Soon he will be looking to trade in his motorcycle in for a golf cart. That means fewer and fewer Harley-Davidson customers as time goes on.
Second, more and more people are falling out of the $90,000 median income level. Believe what you will about the U.S. economy, but as staying in the middle class gets harder and harder, the number of people willing to spend thousands of dollars on a "recreational" vehicle becomes smaller and smaller.
It's no accident that the top of the housing bubble in 2006 coincided with the peak in the Harley-Davidson stock price.
What's more, the AdvisorShares Trust Ranger Equity Bear Team, which manages the Ranger Equity Bear ETF (NYSE Arca: HDGE), announced earlier this month it was shorting HOG because it was seeing rising inventories at dealerships as well as declining motorcycle registrations nationwide.
The Ranger Equity Bear team is also concerned that competitors undercutting Harley-Davidson's pricing could further eat into the company's market share.
In the United States, Harley-Davidson has a dominant 55% share of the motorcycle market. he only competition is Honda Motor Co. Ltd. (NYSE ADR: HMC), which targets the younger motorcyclist, and Polaris Industries Inc. (NYSE: PII), which is reviving the iconic Indian Motorcycle brand. All three companies are fighting for a piece of the dwindling motorcycle market.
So even if Harley announces they have increased sales in the short term - as they did last quarter with a rise of more than 20.1% in motorcycle sales compared to the year-ago quarter in the United States - the good times can't last much longer.
While sales to new customer segments have gone up, it hasn't been enough to compensate for the decline in its traditional customer base.
The same goes for Harley-Davidson's attempts to expand overseas. The modest success there - Latin America saw sales up 15.6% in the last quarter, for example - can only delay the inevitable.
Time to Put the Brakes on Harley-Davidson Stock
No doubt, Harley-Davidson stock has been on an incredible ride upwards over the past year. The HOG stock price is currently just 10% below its 2006 all-time highs.
I should point out that two catalysts could push the Harley-Davidson stock price beyond these highs, albeit temporarily.
One is the Fed's ongoing quantitative easing program, whereby money continues to flow into the stock markets, which could artificially push the Harley-Davidson stock price higher.
And the other is a sense of ease among homeowners feeling more confident in the price appreciation of their home - and thus more willing to pay lavishly for the adventure of riding the highways on a Harley.
But as far as the Harley-Davidson stock price making new highs on the merits of the company itself - I find that to be a stretch.
The U.S. market is shrinking, and those new avenues of success overseas are limited, especially with Europe still struggling to find some economic footing.
Any surge we see on top of recent gains will be short-lived.
That's why I would SELL Harley-Davidson stock now, and instead look for companies more in tune with what people need rather than what they want.
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About the Author: David Mamos brings nearly 15 years of analytical experience to the table, with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation, and execution of trading strategies for aggressive investors.
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