Harley-Davidson’s Lower Near-Term Outlook Might Not Mean That It Is Past Its Glory Days

Harley-Davidson‘s (NYSE:HOG) stock has declined by over 12% in the last three months, falling by roughly 3% in the last week. The American maker of cult heavyweight motorcycles had a rough sales patch since hitting its peak in 2006, as a recession in developed markets slowed consumer spending, especially on luxury items. Motorcycle volumes returned to growth in 2011, and have been rising since, but what could worry Harley’s investors and enthusiasts is slowing volume-growth, which has declined sequentially in the last couple of years, and is expected to again fall this year. Harley expects to ship around 270,000-275,000 units this year, still 20% lower than 2006 levels. With volume-growth slowing in recent times, would the quintessential American motorcycle maker not fully regain past glory in the coming years?

See our full analysis for Harley-Davidson

U.S. forms almost two-thirds of Harley’s annual shipments, and Europe another 15-20%, highlighting the company’s dependence on these markets. Signs point towards an ageing baby boomer generation in the U.S., and increasing customer preference for fuel-efficient and economically viable modes of transport, which could deter growth for Harley-Davidson. Demand has remained weak in the domestic market this year, and Harley’s stock, which surged almost 50% last year, took a toll after the company lowered its full-year shipment outlook mid-year. To add to the company’s woes, around 126,000 2014 Touring motorcycles have to be recalled due to a clutch problem that could potentially cause crashes. Around 1,400 new Street motorcycles are also being recalled over a possible fuel tank leak. ^[1]

Harley-Davidson Still Has Fuel Left In The Tank

Concerns over slowing volume-growth could be only temporary for Harley-Davidson. In addition to low overall sales of heavyweight motorcycles in the U.S. in the first half of the year, impacted by weak macroeconomic conditions, the company’s market share suffered. But this slowdown was more because of low availability of the much awaited Street motorcycles and absence of the popular Road Glide from the 2014 model year, than lower consumer demand for Harley-Davidson. The latter half of the year should see rejuvenated retail volumes for the company in the U.S., with improved availability of the Street bikes and launch of the Road Glide in the 2015 model year.

Harley launched the Street 750 in India early this year, and also introduced the motorcycle in Italy, Spain and Portugal recently. The company has reported higher than expected retail sales of the Street 750 in India and Southern Europe so far, and continues to expect overall Street shipments to range between 7,000-10,000 this year. Around 2,200 Street 500 units were sold to U.S. dealers through June for use in the company’s Riding Academy, and higher availability and consumer demand could increase this figure to around 5,000-6,000 units in the country this year.

The reason for the company to lower overall shipment guidance for the full year could merely be a case of slow pickup in sales due to unforeseen, but somewhat trivial, bottlenecks, lowering sales in 2014 due to weak first half results. Even if sales do not pick up at the tail-end of the year, there is more than one reason to believe they will pick up starting 2015. Street motorcycles will begin selling on a broader scale by next year, and could constitute as much as 7-8% of the net shipments, up from the expected 4% this year. Volume sales of the Street 750 and 500 and the Road Glide, which formed roughly 10% of U.S. retail sales in Q2 2013, will be incremental for Harley, thus boosting volume growth.

Rebounding Europe Could Sustain Overall Growth

One of the main reasons why Harley’s volume growth has slowed in the last couple of years is lower sales in Europe, which was hit by the double-dip recession. Europe formed just over 16% of Harley’s net retail sales last year, and dragged down the overall shipments figure for the company, despite positive growths in the U.S. and rest of the world. With shipments expected to be weak in the U.S. this year, rebounding European sales could possibly offset this decline and sustain volume growth for the manufacturer. After declining by 14% in the last couple of years, the European heavyweight motorcycle market (601+ cc) grew by 14% in the first six months of this year, signalling strengthening economic conditions and consumer demand. ((Harley-Davidson Q2 results))

What also works for Harley-Davidson is that its market share in Europe increased in each of the last couple of years, reflecting how the motorcycle giant fared better than its competitors in the region during tough economic times. The company’s market share rose by 1.7 percentage points between 2011-2013 to 15.1%. With the Street 500 and 750 going on sale in parts of Europe, Harley will also be able to expand its customer base to include those who prefer cheaper and lighter motorcycles. After falling by 3% between 2011-2013, we expect Harley’s European shipments to rise by over 7% this year and almost 25% by 2020.

Concept Electric Bike Could Be The Future

Harley-Davidson could be lining up another volume model in the coming years by launching a plug-in electric motorcycle. The new electric motorcycle dubbed LiveWire is strictly a concept as of now, but could go into mass production in 2016. What’s significant about this model, other than a completely different working mechanism, is that it could be the key for Harley to unlock vast potential in the electric high-power motorcycle market. Although global electric motorcycle sales are expected to reach 1.2 million units this year, this number mainly comprises electrical scooters and small low-powered bikes. Zero Motorcycles, the highest seller of high-power full-sized electric bikes, is expected to sell only 2,400 units in 2014. Lower electric range and a deviation from Harley’s iconic heavyweight motorcycle brand image might be obstacles to sales of the company’s new electric bike.

Estimating sales of Project LiveWire right now might be a shot in the dark, but if produced commercially on a large scale, these motorcycles could definitely be a shot in the arm for Harley’s domestic sales. The company that has long been considered the victim of an ageing baby boomer population, is evolving with shifting market trends and could attract millennial customers. Electric motorcycles could attract higher sales by leveraging Harley’s strong brand name and increasing popularity of environmentally viable modes of transport. In addition, the company has in recent times increased focus on sales to young adults (ages 18-34), women, African-Americans, and Hispanics, also known as its outreach customers, in order to add incremental volumes. In 2013, the volume growth rate for outreach customers in the U.S. was more than twice the growth rate for core customers. While recent data might suggest slowing growth rates for Harley, the company’s future plans that include new potential customers could ensure sustained high volume growth.

Our current price estimate for Harley-Davidson stands at $64.79, which is around 7% higher than the current market price.

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1. Harley-Davidson recalls all 2014 Touring motorcycles, money.cnn.com [↩]