Harley-Davidson: Geared For Growth In Europe

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Harley-Davidson

Harley-Davidson (NYSE:HOG) has been on a steady road to recovery since its overall wholesale motorcycle shipments dropped to just over 200,000 units in 2010. The company is slowly but surely inching closer to its peak shipment figure of nearly 350,000 units in 2006, with worldwide shipments rising 24% between 2010 and 2013 to over 260,000 units. However, volume-growth for Harley has slowed down sequentially over the last three years, especially in the U.S., which forms about two-thirds of the net shipments. The Milwaukee-based manufacturer’s volumes grew by an impressive 16% in the domestic market in 2011, as the economy regained pace after the recession. But the pace of recovery in sales has since slowed, after an initial spurt in demand, which brings forth the question- Will Harley-Davidson return to 2006 levels any time soon?

Even with a conducive economic environment, Harley’s domestic business is threatened by an ageing baby boomer population, which forms the core customer base for the iconic motorcycle maker. Evolving with changing demographics and customer trends, Harley has looked to launch new products, such as lightweight motorcycles and concept electric bikes, more suited to the current crop of potential motorcycle owners, who prefer cheaper, lighter and economically viable vehicles. These new products could provide the necessary push to Harley’s motorcycle sales in the coming future. In addition, although the company still heavily depends on domestic demand, increasing sales in international markets could be pivotal in driving annual shipments near the elusive 350,000 units mark. In particular, we will focus on Harley’s potential in the European markets, where economies are now steadily stabilizing after the double-dip recession.

Our current price estimate for Harley-Davidson stands at $65.24, which is around 1% lower than the current market price.

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See our full analysis for Harley-Davidson

Europe Sales Have Grown This Year- A Trend That Could Last A While

After declining by 14% in the last couple of years, the European heavyweight motorcycle market (601+ cc) grew by 13.2% in the first nine months of this year, signalling improving economic conditions and strengthening consumer demand. [1] Harley’s retail sales in Europe also picked up by 6.3% over the previous year during this period, reversing the declining trends seen in the last two years. A recovery in sales in this region, which constitutes 15% of Harley’s net volumes, is one of the main reasons why the company could achieve its target of 4-6% shipment growth this year, despite weaker demand in the U.S. In fact, with an expected increase in retail sales in the U.S. in Q4, following the launch of the popular Road Glide along with other 2015 model year bikes, and higher availability of the Street 500 and 750, Harley’s overall shipments could further rise.

One of the main reasons why we expect Harley’s Europe sales to rise is the launch of the lightweight Street pair in the region. The company launched the Street 500 and 750 in Italy, Portugal and Spain this year, and has reported higher than expected sales of these bikes in the countries so far. Now the company plans to increase shipments of the Street in Europe in the fourth quarter, and enter other markets within this region by next year, which should see volumes rise significantly by this time next year. The Street motorcycles could form around 7-8% of the net shipments in their first full year in 2015, according to our estimates, expanding Harley’s customer base to those who might be inclined to buy cheaper and lighter motorcycles. [2]

Harley will also begin the demo of the Project LiveWire in Europe come next year, in order to gauge the response to the new concept plug-in electric motorcycle developed by the company. Similar to what Harley did in the U.S. this year, the company will handover the LiveWire motorcycles to customers for a test-drive or provide the riding experience in simulators, acting as a “mock test” for the LiveWire before the company considers mass production. A possible introduction of the motorcycle in Europe in the next couple of years would see Harley venture into the electric motorcycle market. Global electric motorcycle sales are expected to reach 1.4 million units by 2023, up from around 1.2 million units this year, fueled by high anticipated demand in Europe. Although this number mainly comprises electrical scooters and small low-powered bikes, what matters at this point is that there is visible demand for electrically-powered vehicles in Europe. Just for reference, electric car sales were up 77% year-over-year in Europe in the first half of this year. [3] Harley-Davidson has a strong brand recognition, and given its market muscle and global reach, the company could create demand for its high-power electric motorcycles in Europe, going forward. This provides a glimpse to a possibly bright future for Harley in Europe.

Weak Economic Growth Could Suppress Harley’s Europe Sales

While Harley’s retail motorcycle sales and overall motorcycle sales have grown in Europe so far this year, some signs prompt towards limited growth in the region in the near term. GDP growth in the euro zone, which was positive in four previous quarters, stalled in Q2. [4] The euro zone economy continues to stagnate, with falling inflation rates and consumer price rises. Inflation dropped to 0.4% in October, below the European Central Bank’s target of around 2%, giving rise to fears of deflation. The euro has also depreciated around 7% against the U.S. dollar over the last twelve months, and further unfavorable currency translations in the region could drag down Harley’s revenues. [5]

With tightening incomes, consumers typically look to cut down on luxury expenditures, which could stall sales of the Harley bikes. However, despite the fact that economic recovery in Europe has been weaker than expected, Harley’s volume growth in the region could be steady. The new Street motorcycles, having relatively lower prices and carrying the strong Harley brand name, could attract the millennial customers. In addition, a possible introduction of Harley’s plug-in electric motorcycle could also persuade customers to purchase the low emission and environmentally viable motorcycle, and as the necessary battery-charging infrastructure improves, electric motorcycles would also be more economically viable.

Harley-Davidson’s market share in Europe also increased in each of the last couple of years, despite the constricting market size, 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%. We expect Harley’s Europe motorcycle shipments to cross 50,000 units by 2018, up from around 42,550 unit sales last year.

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Notes:
  1. Harley-Davidson 10-q []
  2. Harley-Davidson earnings transcript []
  3. Electric car sales in Europe []
  4. Euro area GDP growth rate []
  5. Euro vs. U.S. Dollar exchange rates []