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Investment Overview for Harley-Davidson (NYSE:HOG)
WHAT HAS CHANGED?
Lower U.S. shipments have made Harley-Davidson lower its guidance
Retail sales of motorcycles were down through Q3 in both the U.S. and international markets. The company expected to ship 276,000 - 281,000 motorcycles to dealers and distributors this year, up 2-4% year-over-year, despite wholesale shipments declining almost 5% through the first half of the year. With the disappointing sales results in Q3, Harley again re-adjusted its estimates for the full-year wholesale shipments, and now expects to ship 265,000 - 270,000 units, flat to down 2% compared to a year ago.
The main focus for the company remains keeping supply in line with demand, and not give out excessive price discounts, in a bid to protect its premium brand image. However, reducing its shipment guidance twice in the last 52 weeks has impacted investor sentiment negatively.
Delay in launching Project LiveWire could impact future volumes
It might be two to three years before Harley-Davidson launches its own plug-in motorcycle, code-named Project LiveWire, which was previously expected to be launched by 2016. There are two ways in which this could play out -- it could either give Harley enough time to upgrade its technology, and come out with a more solid, and potentially winning product, or it could give the company's competition a head-start in the electric motorcycle space.
U.S. Heavyweight Motorcycle Market Size and Harley-Davidson U.S. Market Share:
Heavyweight motorcycle sales in the U.S. have been hit severely since 2006, with 2010 sales (~360,000 units) falling at over 50% below 2006 sales. However, the market did show signs of recovery and the total U.S. shipments grew by ~4% in 2011 as well as in 2012. The overall market grew by 2.2% and 2.5% in 2013 and 2014, respectively. We believe the market has already bottomed out in 2010 and it will recover along with the economy. Meanwhile, Harley-Davidson's market share is dependent on consumer preferences for touring and cruiser motorcycles (that the company produces) vs. sports and dual-purpose motorcycles. Younger generations have shown a preference for sports and dual-purpose motorcycles, a trend that could affect Harley-Davidson's market share. If the U.S. market does not recover as we anticipate, and rises to just 380,000 units by the end of the forecast period instead of the currently projected 410,000, and Harley-Davidson garners just a 50% market share instead of the 55.6% that we expect, there could be a 6% downside to the Trefis price estimate. On the other hand, if the market size grows to ~450,000 units by 2021, and Harley-Davidson's market share rises to 58%, there could be a 6% upside to our price estimate. We believe the upside scenario is probable, since Harley-Davidson's core base is the baby boomer generation who have at least a decade of riding years ahead of them.
- SG&A as % of Gross Profits:Harley-Davidson's SG&A expenses as a percent of Gross Profits increased from 15% in 2006 to 38% in 2011. This jump was due to lower motorcycle sales resulting in lower gross profits, without a corresponding decrease in SG&A expenses. In 2013 and 2014, the figure stayed relatively stable. We forecast the figure to remain relatively stable through the end of the forecast period. However, if the SG&A as a percent of Gross Profits falls to 27% in the long run, there could be a 10% upside to the Trefis price estimate.
Harley-Davidson is a manufacturer of heavyweight (601cc+) cruiser and touring motorcycles. Harley-Davidson is an iconic brand that commands a ~55% share in heavyweight motorcycle sales in the U.S. After the U.S., the most significant markets are Europe and Japan. Harley-Davidson is known to engage its customers in motorcycling related community activities. The company sponsored the Harley Owners Group (HOG) which is the largest riding club in the world, with over 1 million members. Such initiatives boost sales of motorcycle accessories and merchandise, which contribute a significant amount to the overall revenue. Like most automobile manufacturers, the company has a financial services division called Harley-Davidson Financial Services (HDFS) that provides retail loans to customers to buy new and used motorcycles, provides wholesale loans to dealers to help them finance their operations, and also acts as an agent to provide motorcycle related insurance to customers. In 2009, the company embarked on a significant restructuring plan to streamline its operations. This plan completed in 2013.
Despite a shrinking market over the past few years, U.S. motorcycle sales are still the largest source of value for Harley-Davidson
U.S. Heavyweight Motorcycle sales account for about 64% of the company’s overall motorcycle sales, making it the largest single geographic market for Harley-Davidson. Over the past few years, overall heavyweight motorcycle sales have declined significantly in the U.S. while international sales have increased slightly. Revenues from international markets (excluding U.S. and Europe) have consistently risen, while U.S. revenues still haven't reverted to pre-recession days. The market did show signs of recovery and the total U.S. sales grew by ~32% between 2010-2014. Despite already forming two-thirds of Harley's net shipments, U.S. motorcycle sales still haven't reached the highs seen in pre-recession times. We believe U.S. motorcycle sales will recover over the next few years making this region a strong source of overall motorcycle sales growth.
Increased push in wholesale and retail lending by Harley-Davidson Financial Services (HDFS)
Harley-Davidson has significant lending operations, financing 100% of its dealers in North America through its subsidiary HDFS. It also finances a significant portion of new motorcycle retail sales. Harley-Davidson has recently increased lending for used motorcycles via its dealer network. As of December 31, 2014, unused lines of credit extended to HDFS' wholesale finance customers totaled $1.01 billion. Approved but unfunded retail finance loans totaled $168.7 million, up from 149.8 million at December 31, 2013, up more than 70% from the levels seen in 2010. As HDFS continues to finance used motorcycles, its overall loan portfolio will grow at a faster pace than company sales. Furthermore, Harley-Davidson management has said it would like its dealers to increase their inventory. A large part of this inventory is financed via HDFS, thereby further increasing its loan portfolio.
Stabilizing European markets to fuel growth going forward
As the economy recovers, Trefis believes the motorcycle market size will trend back towards its prior highs. The overall heavyweight motorcycle market (601+ cc) in Europe suffered a declining number of registrations between 2011-2013, down to 281,000 units in 2013 from 328,500 units in 2011. Sales were hurt by weak economic conditions and negative consumer sentiment, which also caused retail sales for Harley-Davidson to contract 1% in 2013 and 3% in 2012.
Going forward, heavyweight motorcycle sales are expected to rebound in Europe, bolstered by an uptick in the GDP growth rate, and recovery of sales lost in the last few years. The European heavyweight motorcycle market (601+ cc) grew by 13.5% in 2014, signalling improving economic conditions and strengthening consumer demand. The European Commission revised its forecast for Eurozone economic growth to 1.5% for 2015, up from the previously estimated 1.3%, and 0.9% growth posted last year. This estimate is boosted by continually low oil prices and continual reforms, which are expected to boost consumer purchasing power, which could in turn bolster chances of spending on luxury, high-priced, heavyweight motorcycles. The Eurozone economy could grow by 1.9% next year.
Harley-Davidson enters the lightweight segment with the Street motorcycles
The Street 500 and Street 750, built on the new "Revolution X" platform, are the first lightweight motorcycles for Harley-Davidson since the 350 cc Sprint, which was discontinued in 1974. The highly anticipated bikes went on sale in the U.S. in June 2014, and before that, the Street 750 was launched in India at the beginning of the year. The company also launched the Street pair in Italy, Portugal, and Spain in 2014. The company sold 9,900 units of these bikes in 2014, and is now launching these bikes in Canada and other parts of Europe.
The two models are expanding Harley's reach to new and outreach customers in the U.S., which means that the company's sales in the future could remain strong in its single largest market, despite the aging core customer base of baby boomers. The Street pair is expected to attract customers who would prefer a Harley-branded cheaper and lighter motorcycle. According to surveys conducted by the company, the Street motorcycles are attracting outreach customers (young adults, women, Hispanics, African-Americans) that are new to the Harley-Davidson brand. This bodes well for Harley, which is actively trying to increase its outreach sales.
Increase in non-traditional riders taking up motorcycling
The core customer base for heavyweight motorcycles in the U.S. consists of middle-aged Caucasian males. But with an aging population of baby boomers in the domestic market, and rising popularity of affordable lighter motorcycles among millennial customers, the heavyweight motorcycle market might see negligible growth in the coming years. Harley-Davidson hopes to meet the deficit created by its declining core customer base with sales to its outreach customers. According to the company, the growth rate of outreach consumer sales was two times that of core consumer sales in 2013 and 2014.
Strict riding laws in China resist growth for Harley
Many local governments in China have imposed laws against bike-riding in order to curb traffic and drive-by thefts associated with motorcycle riders. Low safety performance has also been cited for the restriction of bikes in some cities. Motorcycles have been banned in close to 200 cities, including the highly populated Beijing and Guangzhou. China also limits distribution of number plates to control traffic on roads. In addition, motorcycles have to be scrapped after eleven years of registration, as per law in China. This law encompasses not only the cheaper mopeds and scooters, but also high-end premium motorcycles. Strict laws laid down by the Chinese government clearly point to the absence of a leisure biking culture in the country. If no amendments are made to these regulations in the future, growth of the heavyweight motorcycle in China could continue to face headwinds.
Harley-Davidson completed its five-year long restructuring operations in 2013, for which it spent a total of $479 million since 2009. The company saved $305 million due to its restructuring activities and expects to save $320 million a year now. The company expects a "moderate" y-o-y increase in gross margins in 2015. Due to higher pricing of new models and lower operating expenses, the company also expects operating margins for its motorcycle segment to range between 18%-19% in 2015, up from 18% in 2014.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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