Harley-Davidson (HOG) Last Update 3/1/21
Related: DDAIF F HMC GM
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
Harley-Davidson
STOCK PRICE
DIVISION
% of STOCK PRICE
Net Debt
3.0% $1.25
TOTAL
100%
$41.91
$40.65
Yours
Trefis Price
N/A
$42.05
Market
 
Top Drivers for Period
Key Drivers
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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

Harley-Davidson Company

VALUATION HIGHLIGHTS

  1. Motorcycles and Related Products constitute 56% of the Trefis price estimate for Harley-Davidson's stock.
  2. Financial Services constitute 44% of the Trefis price estimate for Harley-Davidson's stock.

WHAT HAS CHANGED?

  1. Impact of coronavirus outbreak
Harley-Davidson's stock has suffered as states and countries are on lockdown. As industries have halted production and services, the demand for motorcycles has taken a hit with consumers focusing solely on essentials and not discretionary products. Further, the company has had to shut down its plants, which has led to further declines in its stock. Q2 and Q3 saw a fall of 27% and 8% in total sales volume including 27% and 10% fall in US sales volume respectively.

  1. Latest Earnings
FY 2020 was a year for Harley-Davidson due to Covid-19 emergence. Worldwide retail sales declined by 17% compared to the previous year – with a 17.7% decline in the U.S. and a decline of 27% in Canada and 16% EMEA markets. The company reported revenue of $4.1 billion, down by 24% y-o-y. The earnings were recorded at $0.01, down from $2.70 in the same period of previous year.

  1. Focus On International Retail Growth
Harley-Davidson is focusing on expanding its international operations in 2018. The company commenced operations of its Thailand facility in 2019, and this will enable the company to make more of its products accessible to customers and target the international market, including the China and ASEAN market. Local manufacturing will also ensure competitive pricing as the products do not have to be subject to high import duties.

  1. Launch Of Electric Vehicles
Harley-Davidson is looking to exploit the expanding Electric Vehicles (EV) market, and “Project LiveWire,” the electric Harley-Davidson, has received encouraging feedback in the demo stage. In November 2018, the company's first electric Harley-Davidson stole the show in its European debut at the Milan Motorcycle Show.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

  • Total Worldwide Shipments and Average Revenue Per Motorcycle:

  • Harley Davidson's total worldwide shipments are witnessing a declining growth trend since 2011. While growth remained slow, it was positive until 2014, after which it became negative. The company expects a 25% decline in its shipment volume in 2020 due to the coronavirus outbreak.
    Harley-Davidson's average revenue per motorcycle increased by more than 7% annually in 2018 but fell in 2019. In 2020 we expect it to fall further and then increase marginally over our forecast period. However, if via new model launches in line with customer preferences, if the company can generate higher revenue per motorcycle, there can be an upside to our price estimate.
  • SG&A as % of Gross Profits:
  • Harley-Davidson's SG&A expenses as a percent of Gross Profits increased from 37.6% in 2016 to 45.5% in 2019. We forecast the figure to fall through the end of the forecast period. Further, if the SG&A as a percent of Gross Profits falls to 31% in the long run, there could be a 15% upside to the Trefis price estimate.

BUSINESS SUMMARY

Harley-Davidson is a manufacturer of heavyweight (601cc+) cruiser and touring motorcycles. Harley-Davidson is an iconic brand that commands a ~50% share in heavyweight motorcycle sales in the U.S. After the U.S., the most significant markets are Europe and Japan. Harley-Davidson is known to engage its customers in motorcycling-related community activities. The company sponsored the Harley Owners Group (HOG), which is the largest riding club in the world, with over 1 million members. Such initiatives boost sales of motorcycle accessories and merchandise, which contribute a significant amount to the overall revenue. Like most automobile manufacturers, the company has a financial services division called Harley-Davidson Financial Services (HDFS) that provides retail loans to customers to buy new and used motorcycles, offers wholesale loans to dealers to help them finance their operations, and also acts as an agent to provide motorcycle related insurance to customers. In 2009, the company embarked on a significant restructuring plan to streamline its operations - this plan completed in 2013.

SOURCES OF VALUE

Despite a shrinking market over the past few years, U.S. motorcycle sales are still the largest source of value for Harley-Davidson

U.S. Heavyweight Motorcycle sales account for almost two-thirds of the company’s overall motorcycle sales, making it the largest single geographic market for Harley-Davidson. Over the past few years, overall heavyweight motorcycle sales have declined significantly in the U.S. while international sales have increased slightly. Revenues from international markets (excluding the U.S. and Europe) have consistently risen, while U.S. revenues still haven't reverted to pre-recession days. Despite already forming two-thirds of Harley's net shipments, U.S. motorcycle sales still haven't reached the highs seen in pre-recession times. We believe U.S. motorcycle sales will recover over the next few years, making this region a strong source of overall motorcycle sales growth.

Increased push in wholesale and retail lending by Harley-Davidson Financial Services (HDFS)

Harley-Davidson has significant lending operations, financing 100% of its dealers in North America through its subsidiary HDFS. It also finances a significant portion of new motorcycle retail sales. Harley-Davidson has recently increased lending for used motorcycles via its dealer network. As of December 31, 2019, unused lines of credit extended to HDFS' wholesale finance customers totaled $1.14 billion. As HDFS continues to finance used motorcycles, its overall loan portfolio will grow at a faster pace than company sales. Furthermore, Harley-Davidson management has said it would like its dealers to increase their inventory. A large part of this inventory is financed via HDFS, thereby further expanding its loan portfolio.

KEY TRENDS

Stabilizing European markets to fuel growth going forward

As the economy recovers, Trefis believes the motorcycle market size will trend back towards its prior highs. The overall heavyweight motorcycle market (601+ cc) in Europe suffered a declining number of registrations between 2011-2013, down to 281,000 units in 2013 from 328,500 units in 2011. Sales were hurt by weak economic conditions and negative consumer sentiment, which also caused retail sales for Harley-Davidson to contract 1% in 2013 and 3% in 2012.

However, motorcycle sales rebounded in Europe in 2014,2015 and 2016, rising by 13.5%, 10%, and 11.4% respectively. Although sales volume was significantly lower in 2017, heavyweight motorcycle sales are yet expected to display growth in Europe, bolstered by the recovery of sales lost in the last few years. In FY 2019 the company reported a decrease of 1.4 percentage points in market share taking it to 8.9%

Increase in non-traditional riders taking up motorcycling

The core customer base for heavyweight motorcycles in the U.S. consists of middle-aged Caucasian males. But with an aging population of baby boomers in the domestic market, and the rising popularity of affordable lighter motorcycles among millennial customers, the heavyweight motorcycle market might see negligible growth in the coming years. Harley-Davidson hopes to meet the deficit created by its declining core customer base with sales to its outreach customers.

The company is focusing on building a new generation of Harley riders, as the core customer base ages. The long-term strategy through 2027 focuses on building 2 million new Harley-Davidson riders in the U.S.