Harley-Davidson (NYSE:HOG), the world’s largest heavyweight motorcycle manufacturer, has risen more than 20% in the last six months alone. Improved profitability combined with an increasing presence in international markets have lifted sentiment for the stock. We have a $57 price estimate for Harley-Davidson, which is about 10% ahead of the current market price.
Here are some factors supporting our outlook:
1) Enhanced Profitability
- Harley-Davidson Earnings Review: Sales Improve On The Back Of Strong International Retails
- Harley-Davidson Earnings Preview: Retail Sales To Be Affected By Competition, Macroeconomic Headwinds
- Harley-Davidson: The 2015 Year In Review
- What Will Be The Impact On Harley-Davidson’s Valuation If Motorcycle Sales In The US Accelerate?
- What Will Be The Impact On Harley-Davidson’s Valuation If Motorcycle Sales In The US Decline?
- Where Will Harley’s Revenue And Gross Profit Growth Come From Over The Next Three Years?
One of the key aspects for Harley’s revival is the expansion in its margins. The company’s gross margins have improved from 32.3% in 2009 to 34.8% in 2012, helped by the ongoing restructuring process initiated by the company in 2009. Harley expects savings from restructuring to total $305 million in 2013, up from $280 million in 2012. Of this amount, 60% will directly benefit the cost of sales. As a result, the company expects its gross margins to widen by 50 basis points further in 2013. 
2) Bolstering Its International Presence
Very few brands around the world enjoy a cult brand status like the Harley-Davidson. This recognition will help the company when entering new markets. Harley’s entry into a new country automatically creates buzz among bike enthusiasts, which also helps the brand connect with other potential customers.
If Harley wants these markets to contribute meaningfully to the top line, it will have to grow volumes, which will only happen if its bikes are priced at affordable prices. For more cost effective measures, Harley has set up two assembly plants outside the United States – one in Brazil and the other in India. These facilities help the company assemble parts locally, thereby circumventing the import tariffs and consequently lowering its prices. After Harley started assembling its motorcycles locally, it has been able to cut its prices by as much as 25%.
For example, Harley is now developing a new 500 cc motorcycle in India made specifically for the country with a starting price of less than $7,000. The company only sold about 2,000 units in India last year, but the sales number could easily grow multifold as its portfolio of lower-priced products rises. Harley expects the sales in India to touch 10,000 units in the next 2-3 years.
Harley also opened its first dealership in the Philippines last month.  Back in 2009, the company had set a goal of adding 100 to 150 new international dealerships within the next five years. By the end of 2012, it had opened 93 new dealerships. As the proportion of sales from the emerging economies rises, their contribution to the total profits will be more evident on the income statement.
3) Improved Production Capabilities
Harley predicts its sales volume to rise 10-18% in the first half of 2013, helped by the new surge in manufacturing capability at its York facility launched at the start of the year. According to the company, since motorcycle sales tend to be seasonal, the “new surge facility” will give the company the ability to raise production as and when required. 
The company also plans to implement a similar surge facility at its Kansas unit, which will further enhance the company’s flexibility to adjust production to meet the changing demand. Once these two units are fully functional, Harley will be in a position to capitalize on demand fluctuations as well as manage its inventory better.Notes:
- HOG 10-k [↩]
- First Harley-Davidson dealership in Philippines opens, March 6, 2013, bizjournals.com [↩] [↩]