Can Harley-Davidson Ride The Covid Tide?

Harley-Davidson’s stock (NYSE:HOG) has declined around 30% since the beginning of the year. The automotive industry is rattled, and Harley-Davidson is no exception. A Covid recession will impact the company’s revenues, cash flows, and ability to pay dividends. Fading consumer demand, reduced discretionary spending, and stay-at-home orders, will result in minimal demand for heavyweight motorcycles. With the car rental industry’s Hertz filing for bankruptcy protection, it shows the situation of the automotive industry. While a bankruptcy doesn’t necessarily mean a company going out of business, it can also include massive financial restructuring.

Trefis analyzes the potential Impact Of The Covid-19 Recession On Harley-Davidson with a focus on the company’s liquidity reserves and concludes that Harley-Davidson has a steady financial position and a Covid-19 recession will not have a major impact on the company’s cash reserves in the near term.

Impact On Harley-Davidson’s Revenues 

• If the outbreak of the virus increases, Harley-Davidson’s demand will be low until the situation improves. As a result, Harley-Davidson‘s revenues could decline by about 30% in FY’20, on account of weaker demand, potential supply constraints, and a reduction in discretionary spending.
• In addition to that, the company derives nearly 70% of its revenues from the US, which has become the epicenter of the outbreak – recording the largest numbers of Covid-19 cases across the globe.

Impact On Harley-Davidson’s Cash Flows

• Harley-Davidson’s cash flows are likely to plunge in FY2020 due to a steep fall in revenues and reduced profitability.  
• The company will have to offer motorcycles at a discount to keep the cash flowing. 
• Elevated costs, coupled with lower revenues, will hurt the company’s bottom line. 
• Despite these measures, we estimate that Free cash flow from operations (FCFO) will go down from $868 million in 2019 to $412.9 million in 2020. Also, with expected capital expenditures of $90.7 million for the year, FCFO-CapEx will be $322 million in 2020.

Cash Balance Impact

• This will lead to a 2020 cash balance of $1.2 billion, which is higher when compared to 2019. 
• This is with the assumption that the company will not pay dividends or re-purchase shares. While that may be a disappointment for existing investors, these moves by the company will be essential for its long-term survival.

Conclusion

To sum things up, Harley-Davidson can weather a recession through Q2 2020 and a 30% decline in revenues by cutting Capex, eliminating  share repurchases, and suspending dividends. 

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

An alternative scenario for Harley-Davidson’s cash flows with a 50% decline in revenue instead is detailed as a part of our full analysis.

While Harley-Davidson seems to be in a relatively comfortable position to ride the Covid tide, How has SAP fared?

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