Harley’s Results Look To Ride Developing Markets Demand

Harley-Davidson (NYSE:HOG) is scheduled to announce its Q1 earnings on April 25. The stock has surged more than 20% in the past six months on the back of solid earnings and a positive outlook for 2013. Besides selling the iconic motorcaycles, the company also offers its brand merchandise and provides wholesale/retail financing and insurance programs to dealers and customers. The U.S. accounts for about two-thirds of its total motorcycle sales.

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. ^[1] Since motorcycle sales tend to be seasonal, the “new surge facility” will give the company the ability to raise production as and when required as the company claims.

See our full analysis for Harley-Davidson

Margins To Remain Stable

The company is nearing the end of a comprehensive five-year long restructuring process and will hope to see substantial cost savings from its efforts going forward. The restructuring process began in 2009, and is expected to reduce manufacturing costs, raise efficiency and facilitate far more flexibility in labor requirements. It will also help reduce product development time by 30% that will enable the company to launch new models faster.

The gross margins should remain relatively stable with a slight upward bias. Helped by the ongoing restructuring process, the company’s gross margins have improved from 32.3% in 2009, to 34.8% in 2012. The company expects the gross margins to rise by another 50 basis points in 2013. ^[1]

International Sales

Unit sales growth in international segments will be a key figure to watch out for as the company is banking on the next wave of growth to come from developing markets. Macroeconomic conditions in Europe are extremely weak and the overall heavyweight motorcycle market continues to decline. Harley is doing relatively well, and though it’s not losing market share, its unit sales are not growing either. The company’s shipment volume in Europe declined 5.9% in 2012 even though it extended its market share by 40 basis points.

Thus, until conditions in Europe normalize, the onus of generating incremental sales falls on Asia-Pacific and Latin America. Until now, the company has done pretty well with the proportion of sales coming from these two regions, rising from 12.2% in 2011 to 13.8% in 2012.

Harley also opened its first dealership in the Philippines last month. ^[2] 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.

We have a $57 price estimate for Harley-Davidson, which is about 10% ahead of the current market price.

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1. HOG 10-k [↩] [↩]
2. First Harley-Davidson dealership in Philippines opens, March 6, 2013, bizjournals.com [↩]