Three Scenarios That Could Change Harley-Davidson As We Know It

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Harley-Davidson

Harley-Davidson (NYSE:HOG) is an iconic heavyweight motorcycle maker, only one of two American motorcycle manufacturers to survive the Great Depression. The company also went through recession in the last decade, but has since recovered well. Wholesale motorcycle shipments have increased by approximately 30% since 2010 to over 270,000 units, although still lower than the peak of 2006 (350,000 unit sales). We remain optimistic about Harley’s future business growth, and have factored in the anticipated increase in demand in the U.S. amid strengthening macroeconomic conditions, and further expansion in international markets, which has taken our price estimate to 3% above the current market price.

However, there are some scenarios — three in particular, which could somewhat alter Harley’s valuation.

Our current price estimate for Harley-Davidson stands at $67. The stock fell 5.4% in the last three months.

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See our full analysis for Harley-Davidson

  • Impact Of The New Plug-In Motorcycle-

Harley-Davidson has remained committed to evolving with shifting market trends, and one such example is the company’s concept plug-in motorcycle dubbed LiveWire. The electric motorcycle wrapped up its demo tour in the U.S. last year, and is now moving to Canada, Europe, and Asia-Pacific to gauge customer response to the all-new Harley. The high-performance electric bike market is still in its nascent stages, and not much can be said about how huge this market could be, especially with the entry of Harley which already carries a strong brand name and could leverage its vast distribution channels and marketing muscle to grow.

Fuel prices are low as of now, but once the prices pick up, coupled with the positive perception associated with environmentally-viable vehicles, electric motorcycles could be a huge market opportunity. Assuming this project takes off and LiveWire goes into production next year, we made certain changes to Harley’s U.S. and European market sizes and shares. The company’s current U.S. market share is at 55.5%, which could improve to almost 60% by 2021 (up from our current estimate of 58.6%), if the incremental sales of LiveWire are added. Market size will also swell as we will now consider a wider customer base, extending beyond the 600+ cc motorcycle segment, and including potential buyers of lighter weight electric bikes.

By incorporating the new estimates, which could be further tampered with on the Trefis website, the price estimate for Harley jumps by 8% over our previous base estimates.

With an aging population of middle-aged Caucasian males in the U.S., which traditionally formed the core customer base for Harley, the company has looked to put more emphasis on sales to outreach customers (comprising young adults, women, Hispanics, and African-Americans). For the third consecutive year in 2014, Harley grew sales to outreach customers by more than twice the sales-growth to core customers, which however still form a bulk of the company’s U.S. sales. Outreach sales are growing, and could grow at an even faster rate than previously predicted, fueled by the high estimated sales for the Street 500 and 750 in their first full year in 2015. These are lighter weight and cheaper Harleys, and make the motorcycle maker’s portfolio more attractive to the millennial and outreach customer.

Assuming that the Street pair has a massive impact on Harley’s U.S. sales, the company’s heavyweight motorcycle market share could rise to 62% by the end of our forecast period. This figure might seem overly ambitious, as it is generally considered tough to improve share once its already in the high double-digit percents. However, the Street bikes could form as much as 8% of Harley’s net shipments this year alone, a bulk of which will be in the U.S., which is why market share could grow further. These motorcycles are also bringing-in customers new to the Harley brand, which essentially increases the market size too.

The estimated impact of Harley’s outreach program could see the company’s valuation rise by 10%. Although the EPS estimate is only some cents above consensus estimates, this is because the outreach program will have a long-term bearing on the company’s sales, rather than an immediate impact on revenues and EPS this year.

One downside scenario for Harley-Davidson could be subdued demand in emerging markets, which are currently estimated to drive growth. We currently estimate the manufacturer’s rest of the world (excluding U.S. and Europe) sales to grow at a CAGR of 6.7% through the end of our forecast period to over 80,000 units. However, demand in developing nations and especially for luxury heavyweight motorcycles might not be the same as seen in the U.S. in the early 2000’s. Volatile macroeconomic conditions in certain nations such as Brazil, Russia, and Turkey could mold customer perception and dissuade them from lavish expenditures, which includes heavyweight motorcycles. China is also slowing, even though the GDP growth rate is above 7% as of now. On the other hand, Harley’s revenue in Japan, which is its largest international market, declined 10% last year on flat volumes and negative currency translations, and the market could continue to stagnate in terms of volume growth. The future might not be as bright as first thought for the company in international markets.

If we consider this hypothetical situation and forecast international sales to rise only at a CAGR of 2.3% over our forecast period, there could be a 8% downside to our current estimate of profits for Harley in 2020.

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