Harley-Davidson (NYSE:HOG), a world-class maker of heavyweight motorcycles, has seen its stock surge 20% since July last year. This mainly reflects how the company’s new launches and expansion into international markets has spurred investor sentiment. Despite an aging core demographic of baby boomers in the U.S., Harley managed to generate $5.9 billion last year, only ~$300 million shy of its peak in 2006. On the back of strong sales for the Project Rushmore bikes and expected incremental sales from the Street 750 cc, the motorcycle manufacturer estimates 279,000-284,000 unit shipments this year, up 7-9% year-on-year. In order to meet this estimate, Harley will not only depend on international growth, but also hope for demand to rise in the sluggish European markets. Europe constituted over 16% of Harley’s worldwide retail sales last year, but has witnessed negative volume growth over the last couple of years. The company will now aim to reverse recent trends in the region, and boost its sales with the launch of the Street in some markets, helped by rebounding economies.
We have a $63.21 price estimate for Harley-Davidson, which is around 5% below the current market price.
Harley’s Sales In Europe Could Improve Going Forward
The overall heavyweight motorcycle market (601+ cc) in Europe has suffered declining number of registrations in the last two years, down to 281,000 units in 2013 from 328,500 units in 2011. Sales have been hurt by weak economic conditions and negative consumer sentiment, which also caused retail sales for Harley-Davidson to contract 1% last year and 3% in 2012. In an environment of slow economic activity, customers have looked to avoid luxury spending, which also includes large expensive motorcycles. However, the silver lining for Harley is that its market share in Europe has increased in each of the last couple of years, reflecting how the motorcycle giant has fared better than its competitors in the region. The company’s market share has risen 1.7 percentage points since 2011 to 15.1%.
Going forward, heavyweight motorcycle sales could rebound in Europe, bolstered by an uptick in the GDP growth rate. The European Union GDP is expected to grow by 1.5% this year and by 2% in 2015, up from only a 0.1% growth in 2013.  Due to a rebound in economic activity in Europe, coupled with present low interest rates levels, consumers might look to increase spending on goods and services. Another data suggests that 54% of high net worth individuals (HNWI) in Europe believe that the global economic environment will positively impact their ability to generate wealth over the next five years.  As HNWIs form the target base for the premium motorcycle market, an increase in wealth could prompt a rise in motorcycle sales as well.
The Street Series Could Add Incremental Sales In Europe
We expect Harley to witness 5% growth in wholesale shipments to Europe this year, and a further 9% increase next year, which will be the first full year for the Street series. With the Street 750 already launched in the domestic market and India, the company will look to introduce the relatively affordable bike in Spain, Portugal and Italy this year. Built on the new ”Revolution X” platform, both the Street 750 and 500 will be manufactured in India for export to Europe. The Street motorcycles are the cheapest Harleys on sale, and aim to attract millennial customers who prefer lighter and cheaper bikes. Harley expects to sell a total of 7,000-10,000 Street 750 units in the U.S., India, Spain, Italy and Portugal this year. Assuming no increase in Europe volumes from last year for the company, if around 3,000 Street 750 models are sold in the three mentioned European markets, there will be a 7% rise in volumes for Harley in the region to over 45,500 units in 2014.
BMW, Triumph And KTM Could Hurt Harley’s Sales
Although Harley-Davidson has been gaining market share in Europe over the last couple of years, the motorcycle maker faces competition from both domestic and foreign manufacturers in the region.
- BMW Has New Model Launches Lined Up
The BMW group saw record motorcycle sales last year, with European sales rising 4.7% year-on-year to 68,961 units.  The company’s unit sales also grew 4.7% to 21,473 units in Germany, which is the largest European market for both BMW and Harley-Davidson. Further growth in Europe for BMW, a direct competitor in the 500 cc+ category for Harley, could hurt the latter’s sales. In fact, BMW’s R1200GS was the highest selling motorcycle in the region last year, beating even the popular mopeds and lightweight bikes (50 cc-250 cc).  The company has also planned seven model launches in 2014, posing a threat to Harley’s European sales.
- Domestic Manufacturer Triumph Has Improved Sales
The British motorcycle maker Triumph hit record sales in fiscal 2013 ending June, selling over 52,000 units. According to Triumph, its global market share in the 500+ cc improved from 5.7% to 6%.  The company’s domestic market share in the U.K. stood at 20%, thereby maintaining market lead. Triumph will aim to carry this momentum to 2014 and remain the top heavyweight motorcycle maker in its domestic market.
- KTM Sales Are Growing At A Rapid Pace
The European motorcycle maker KTM sold 123,859 bikes last year, almost doubling sales from 2008 levels. The company believes that it is growing at a faster rate than any other heavyweight motorcycle manufacturer in the world. As KTM aims to increase production to around 200,000 by 2016, rising sales for the brand could possibly deter growth for Harley all around the world including Europe. ((“webbikeworld.com“)) However, 50% of KTM’s portfolio includes bikes with engine displacements less than 500 cc. Seeing how lighter motorcycles are more popular with millennial customers and also in emerging economies, most of the growth for KTM could come from the 0-500 cc market, thus not encroaching Harley’s market.
We estimate Europe sales for Harley-Davidson to reach nearly 55,000 units by the end of the forecast period. However, if volumes for the company reach 80,000 on account of strong sales for the Street and/or other Harley motorcycles, there could be an almost 3% upside to our price estimate.Notes:
- “European economic forecast“, europa.eu [↩]
- “Luxury spending to increase for European UHNWIs“, March 2014, property-magazine.eu [↩]
- “BMW annual report 2013“ [↩]
- “The motorcycle industry in Europe“, acem.eu [↩]
- “Triumph motorcycles annual sales hit 50,000 milestone“, December 2013, leicestermercury.co.uk [↩]