The Year That Was: Harley-Davidson

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Harley-Davidson

Harley-Davidson (NYSE:HOG) has been recovering its motorcycle sales ever since the recession eroded the company’s annual growth, especially in the U.S.  Motorcycle shipments for Harley dropped to approximately 210,000 units in 2010 from nearly 350,000 units in 2006. One of the main reasons was the loss in customer demand in the U.S., which accounts for around two-thirds of the company’s annual shipments.  Following the recession, Harley’s unit sales have improved each year since 2011, despite the declining volume sales in Europe amid weak economic conditions.  However, although volumes have grown for Harley, volume-growth has slowed down sequentially over the last three years, especially in the U.S.  This year as well, the company is expected to improve annual shipments by 3.5%-5% year-over-year, lower than the growth of 5.2%, 6.2%, and 10.7% in 2013, 2012, and 2011 respectively.

Harley’s stock has taken a hit this year, declining by 4%, mainly as the demand in the U.S. remained weak in the early part of the year, and the recovery in Europe was slower than expected. The company also lowered its full-year outlook on motorcycles after the second quarter, invoking negative investor sentiments. Harley looked to protect its premium brand image and maintain supply in line with demand, and therefore wholesale shipments and consequently financial results in Q3 appeared weak. But what underscored the motorcycle maker’s strong performance in Q3, and is expected to give way to a strong end to the year, was a 3.8% jump in worldwide retail sales in the quarter, despite a 6% fall in wholesale shipments. Higher retail sales in Q3 reflect high customer demand, which could prompt Harley to ship more motorcycles in Q4 and going forward.

With improving domestic demand and European markets returning to growth, it could be a fruitful 2015 for Harley, especially with the new Street 500 and 750 expected to make a splash in their first full year. And then there is the  electric bike, which could be mass produced by 2016 and create a whole new market opportunity for Harley.

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Our current price estimate for Harley-Davidson stands at $65, which is roughly in line with the current market price.

See our full analysis for Harley-Davidson

Watch Out For The Street In 2015

The Street 500 and Street 750, built on the new “Revolution X” platform, are the first lightweight motorcycles for Harley-Davidson since the 350 cc Sprint, which was discontinued in 1974. The highly anticipated bikes went on sale in the U.S. in June, and before that, the Street 750 was launched in India at the beginning of the year. The company also launched the Street pair in Italy, Portugal, and Spain this year, and has reported higher than expected sales of these bikes in the countries so far. The two models are expanding Harley’s reach to new and outreach customers in the U.S., which means that the company’s sales in the future could remain strong in its single largest market, despite the aging core customer base of baby boomers. The Street pair is expected to attract customers who would prefer a Harley-branded cheaper and lighter motorcycle. According to surveys conducted by the company, the Street motorcycles are attracting outreach customers (young adults, women, Hispanics, African-Americans) that are new to the Harley-Davidson brand. This bodes well for Harley, which is actively trying to increase its outreach sales.

In addition to the growth prospects in the U.S., Harley is looking to expand Street sales in Europe, going forward. The company is increasing shipments of the Street in Europe in the fourth quarter, and plans to enter other markets within this region by next year, which should see volumes rise significantly by this time next year. The Street motorcycles are expected to contribute 7,000-10,000 in unit sales this year, and could form around 7-8% of the net shipments in their first full year in 2015, according to our estimates. We have focused on the importance of the Street 500 and 750 because these motorcycles are likely to add incremental volumes for Harley, rather than cannibalizing sales of other company models.

Concept Electric Bike Could Be Real

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 a 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 aging 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, 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 the U.S. and Europe in the next couple of years would see Harley venture into the electric motorcycle market and add another revenue stream for the company.

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 going forward.

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