Harley-Davidson’s (NYSE:HOG) stock has plummeted from almost $54 near the end of April to around $42 today. Although the current price is at a higher level than at the beginning of the year, we believe the stock has an intrinsic value of $56, which implies an upside of over 32%. The market has responded negatively to the management’s cautious outlook based on the global economic slowdown and the demographic trends in the U.S., which are causing a reduction in the company’s core customer base (40-50 year old American males). We, however, believe that the company has solid prospects in the long term for multiple reasons.
1) Dip in Consumer Spending Only Temporary
We think that the market price decline due to the global slowdown is only temporary. Consumer spending will gradually improve and spending on expensive products such as motorcycles will eventually catch up to historical levels. However, we also note that the Euro zone, which currently makes up around 16% of Harley’s total retail sales, could see permanent reductions in consumer spending due to the region’s economic free-fall. Overall though, considering the strong growth in Asia and Latin America, we do not think that this would be a major concern in the long term.
2) Company Targets New Customer Segments
Harley-Davidson is well aware that its core customer base is decreasing in size due to demographic trends. In response, it is actively spending on brand building and marketing activities so as to gain market share in customer segments such as younger men and women in the United States, along with a largely untapped customer base in Asia, Latin America and other international segments. If these efforts are successful, the company can clear this demographic hurdle and realize upside, in our opinion.
3) Restructuring Efforts May Have Long Term Benefits
We believe that the long-term benefits from the ongoing restructuring process may not be fully reflected in the current market price. The restructuring effort is targeted across the company’s operations – from manufacturing to database management and retail. The goal is to improve flexibility of the manufacturing process and create annual cost savings in the range of $315-$355 million upon completion. The process has led to temporary supply-chain disruptions, estimated expenses of $500 million, and a possible downward pressure on sales in the upcoming quarters. Long term, we expect increases in efficiency, margins and cash flows, which will have a positive impact on our price estimate.
We currently have a Trefis price estimate of $56, which is about 32% above the market price.