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Investment Overview for Harley Davidson (NYSE:HOG)
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 US shipment grew by ~4% in 2011 to ~271,000 units. 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 300,000 units by the end of the forecast period instead of the currently projected 360,000, and Harley-Davidson garners just a 50% market share instead of the 58% that we expect, there could be an ~10% downside to the Trefis price estimate. On the other hand, if the market size grows to ~450,000 units by 2019, and Harley-Davidson maintains its current market share, there could be a ~10% 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 % 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 2012, the figure stayed relatively stable. We forecast the figure to fall to ~32% by the end of the forecast period. However, there is potential for SG&A as % of Gross Profits to fall further as the company will benefit from savings due to ongoing restructuring activities as well as operating leverage (sales and gross profits growing quicker than SG&A expenses). If the figure trends towards 25% instead of the projected 32%, there could be a ~10% upside to the Trefis price estimate. On the other hand, if expected restructuring savings do not materialize and SG&A as % of Gross Profits rises to 42%, there could be a ~15% downside to the Trefis price estimate.
Harley-Davidson is a manufacturer of heavyweight (651cc+) 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 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 2008, the company embarked on a significant restructuring plan to streamline its operations. The plan is expected to continue until 2012.
Despite a shrinking market over the past few years, U.S. motorcycle sales is still the largest source of value for Harley-Davidson
U.S. Heavyweight Motorcycle sales account for over 61% 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. (By 2010, U.S. annual sales were down ~50% from 2005 levels, while international sales were marginally above 2005 levels). The market did show signs of recovery and the total US sales grew by ~15% in 2011 to ~150,000 units. Despite this dramatic difference in growth rates, U.S. motorcycles still accounted for over ~150,000 of the company’s ~230,000 motorcycles sold in 2011. 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 over 90% 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 motorcycle via its dealer network. As of December 31, 2011, unused lines of credit extended to HDFS' wholesale finance customers totaled $909.9 million. Approved but unfunded retail finance loans totaled $139.3 million at December 31, 2011, up more than 40% from the previous year. 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.
Younger generations are showing a preference for dual-purpose and sports bikes
The heavyweight motorcycle market can be divided into cruiser, touring, sports and dual purpose. Touring and Cruiser bikes account for 84% of overall heavyweight motorcycle sales in the U.S. A troubling trend for Harley-Davidson is that younger generations are showing a preference for dual-purpose and sports bikes over cruiser and touring bikes (that the company sells). Although sales of new Harley Davidson heavyweight motorcycle registrations grew by ~14% in 2011, the company needs to take a look at this trend as well. Dual-purpose bikes are amongst the most efficient and can be used for both long distance trips and daily commuting. Meanwhile, Harley-Davidson motorcycles are popular primarily with the aging baby boomer generation. Over the past 5 years, the median age of the average Harley rider in the U.S. has increased from 43 to 49.
Increase in non-traditional riders taking up motorcycling
The company defines its core U.S. motorcycle rider as a Caucasian male over the age of 35. However, over the past few years many non-traditional riders (women and people of diverse ethnic groups) have taken up motorcycling, thanks in part to the proliferation of rider training schools. Harley-Davidson has been influential in getting non-traditional riders to take up motorcycling through its Rider’s Edge program which it set up in 2000. Harley-Davidson is looking to encourage more non-traditional riders to take up motorcycling, but aims to do so without alienating its passionate core consumer base.
Riding laws in Asian countries
Harley-Davidson has a significant presence in the U.S, European and Japanese markets. However, heavyweight motorcycle sales in emerging Asian countries are just a fraction of U.S. and European sales. This is in part due to strict motorcycling laws in many Asian countries such as China. In many cities in China, motorcycles are banned from downtown areas, and in some cities, consumers are not allowed to register a motorcycle above 250cc. Motorcycles are also prohibited from using several inter-city highways. An interesting trend to watch out for is whether these countries liberalize their laws and allow heavyweight motorcycles to use highways. Heavyweight motorcycle sales could receive a huge boost if these countries change their laws to be in-line with the U.S. and Europe.
Restructuring activities to continue till 2013
The company has undergone significant restructuring activities since 2008. The restructuring activities were intended to increase production flexibility at Harley-Davidson plants, reduce administrative costs, eliminate excess capacity and exit non-core business operations (such as the Buell family of motorcycles). In 2010, the company entered into new seven-year labor agreements (beginning April 2012) at two of its plants that will include a flexible workforce component. The new agreement will have around 700 workers on contract, around 250 workers less than on the existing contract. The company is currently negotiating a similar agreement with workers at its Missouri plant. The improvements in operations and resulting cost savings will be an important trend to watch out for. In July 2012, the company shifted to the ERP (Enterprise Resource Planning) system of data integration. The system is expected to bring greater flexibility to the manufacturing process.
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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