Harley Davidson’s $40 Fair Value: Inventory Slump Hurting Wandell’s Turnaround Plans

-2.36%
Downside
43.74
Market
42.71
Trefis
HOG: Harley-Davidson logo
HOG
Harley-Davidson

Harley Davidson (NYSE:HOG), the biggest U.S. motorcycle maker, saw its stock drop by more than 12% since the beginning of last week. The company’s CEO Keith Wandell’s is hoping to use Ford (NYSE:F) as a template in Harley’s turn around by cutting fixed costs in labor contracts, cutting costs through streamlining production, pushing Harley into emerging markets such as China and India and pushing its dealer network to improve their stores as well as customer service levels.  [1] This will help Harley improve its U.S. market share that stood at 58% in the third quarter over peers like Polaris Industries (NYSE:PII),  Honda (NYSE:HMC), Yamaha, Suzuki, Kawasaki and BMW that control a major chunk of the remaining market.

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However Wandell’s long-term strategy for Harley is running afoul with some of its dealers and also constraining inventories for some of its pricier models such as Touring. One Minnesota dealer, St. Paul Harley-Davidson, has sued Harley Davidson for restricting international sales and third-party sales on portals such as eBay and Amazon. [2]

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Moreover extensive restructuring of one of its largest manufacturing facilities in York is resulting in decreased production capacity for some of the company’s more expensive and most profitable models, leading to overall margin decline. (See our previous article: Harley Davidson Q3 Margins Squeezed by Plant Restructuring)

A recent new dealership survey by the investment firm Robert W. Baird & Co. confirmed that the inventory of new Harley-Davidson Inc. motorcycles is at its lowest point in 10 years, which will result in lost sales in the near-medium term as the York facility restructuring is expected to continue till 2013. [3]

We currently have a price estimate of $40 for Harley Davison’s stock, which is more than 15% above current market price.

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Notes:
  1. Wandell Leads Harley’s Comeback as Mulally on a Motorcycle: Cars []
  2. Minnesota dealer sues Harley-Davidson []
  3. Harley inventories tight, dealers say []