Harley-Davidson Pre-Earnings: Expect A Strong Finish To The Year

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Harley-Davidson

Harley-Davidson (NYSE:HOG) is scheduled to announce its Q4 and full-year results on January 29. Following the second quarter results announcement, Harley lowered its full-year outlook on motorcycle shipments, from the previously estimated 279,000-284,000 units to 270,000-275,000 units, up 3.5-5.5% from 2013 levels. This was mainly as growth in Europe and some emerging markets was offset by lower volume sales in Japan, Canada, Latin America, and most importantly, the U.S.  The Milwaukee-based motorcycle manufacturer looked to protect its premium brand image by keeping supply in line with demand in the latter part of 2014, as retail sales in the U.S. remained flat in Q2, while shipments to dealers rose 10%. The domestic market forms approximately two-third of the net bike shipments for the company, which is why fluctuations in demand in the country play a major role in shaping Harley’s overall results.

As expected, through the middle of 2014, Harley’s stock took a hit, with Q3 shipments falling 6.2% year-over-year.  However, after bottoming-out at approximately $55 in October, the company’s stock price has since rallied to reach $65, where the stock was trading this time last year. The company has looked to increase shareholder return in the last year through share repurchases and a higher dividend per share, which is up 30% year-over-year through Q3.

Another important point in discussing Harley’s cash flows and possible shareholder return, is the company’s improving profitability. As a large motorcycle manufacturer, Harley has large fixed costs, and consequently uses a high degree of operating leverage.  Despite a significant fall in shipments in Q3, the motorcycle division’s margins rose to 21.3% through September, up from 19.2% in 2013, on a high number of shipments in the first two quarters, benefits of the restructuring that was completed in 2013, and positive product mix.  Revenues for the motorcycle division rose 7.34% through September, and with an expected rise in retail sales in the U.S. in Q4, and continual strength in Europe sales, which have recovered well this year, we expect a strong finish to the year for Harley-Davidson.

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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

Domestic Motorcycle Sales To Bounce Back

What underscores our estimate of positive Q4 shipment results for Harley is an expected rise in retail sales in the U.S.  After retail sales in the country remained essentially flat to slightly positive in the first half of the year, volumes rebounded to a 3.4% growth in Q3 on the back of pent-up demand and new model launches. Wholesale shipments are what go down in Harley’s books as revenues earned, and the company held off shipping motorcycles to dealers in Q3 in order to sell-off inventory from the previous quarter, which is why the third quarter’s income statement appeared weak.  The 3.4% retail sales growth was in fact a milder reflection of the strong volumes in the last quarter, as the company was cycling the strong 20% retail sales growth in the country in Q3 2013, following the launch of the iconic Project Rushmore bikes in August that year.  Retail sales are expected to remain strong again this quarter owing to the strengthening U.S. economic environment and higher consumer purchasing power, as oil prices have fallen approximately 60% since June of last year.

Harley expects to ship 46,500-51,500 motorcycles in the last quarter, flat to 10% above the last year’s fourth quarter shipments of 46,618 motorcycles. We expect the motorcycle manufacturer’s volume sales in Q4 to rise by a high single-digit percentage, boosted by higher availability of the Street motorcycles and the revamped Road Glide.

The two main reasons why volumes were weak in Q2 were the absence of the touring motorcycle Road Glide from the 2014 model year and low availability of the much anticipated lighter weight Street motorcycles. Potential Sportster buyers also decided to wait for the Street launch to compare the varying features and make an informed buying decision. Harley managed to overcome these obstacles in Q3, with the launch of the new Road Glide along with other 2015 model year launches in August. In fact, the Road Glide was the highest selling bike from the new model year, but only constituted 4% of the net retail sales in the quarter, down from 8% in Q3 2013. [1] This was because the model was only available since the latter part of the quarter. Full availability of the Road Glide is now expected to spur domestic sales in Q4. Harley also removed the bottlenecks that limited availability of the Street bikes in the U.S. in Q2, thereby witnessing strong growth in Street and Sportster sales in the country through the third quarter. The company could sell an incremental 7,000-10,000 Street units for the full year, across the U.S., India, Italy, Spain, and Portugal, moving it closer to the higher net shipment estimate of 275,000 units in 2014.

Europe Sales Return To Growth In 2014

Harley’s retail sales in Europe picked up by 6.3% over the previous year in the first nine months of  2014, reversing the declining trends seen in the last two years. This trend could continue into the fourth quarter, especially on the back of high sales for the Street 500 and 750, which were launched in parts of Southern Europe last year and reported encouraging initial volume sales. The Street bikes are cheaper and lighter, more suited to the tastes and preferences of the moped and scooter-riding general European customer, and with increased shipments of the model in Q4, we expects Europe sales to rise.  Harley could leverage its strong brand appeal, cheaper prices of the Street, and higher customer purchasing power to boost sales in the region. However, the Euro Zone economy has not recovered as expected in the last year, and with crude prices reaching historical lows, there is the fear of deflation looming, which could slow economic growth in the future.  2014 should see a positive turnaround in volume sales in Europe for Harley, but with the caveat of possible deflation and slow economic growth in place, volumes could return to the declining trends seen in 2012-2013 in the mid term.

The U.S. forms almost two-thirds of Harley’s annual shipments, and Europe is another 15-20%, highlighting the company’s dependence on these markets. We expect a strong increase in Harley’s wholesale shipments in Q4, owing to the expected high demand for heavyweight motorcycles and the Street bikes, particularly in the U.S., which should pull-up retail sales.

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Notes:
  1. Harley-Davidson earnings transcript []