PII - Harley-Davidson: The Transition To Growth Seems To Be Working

2023-04-06 15:45:01 ET

Summary

• Harley-Davidson has been increasing its sales and earnings since 2020.
• The company is undergoing a strategic realignment, aiming to reach a broader customer base.
• Profitability and valuation metrics are also relatively attractive.

Thesis

The auto and motorcycle industry took a big hit after the Covid-19 pandemic in 2020, while supply chain disruptions still persist today. The iconic Harley-Davidson ( HOG ) brand has been undergoing a strategic refocusing over the past couple of years, while returning to sales and earnings growth. In this analysis, I go over the company's performance, prospects and outlook.

Despite showing elevated levels of volatility the stock has recorded a small -4.10% loss over the TTM, despite a broader stock market downturn. Currently, HOG trades at $37.2 per share and pays a 1.78% dividend yield.

A Timeless Motorcycle Company

Without a doubt Harley-Davidson is an iconic, American brand synonymous with motorcycle riding in the United States. The company has forged a culture of freedom, more than anything else, with its motorcycles being the gateway into that culture. Founded in 1903, the company later reorganized the business into three reportable segments: Harley-Davidson Motor Company or HDMC (motorcycles, parts and apparel), LiveWire (an all-electric motorcycle brand), and Harley-Davidson Financial Services or HDFS.

Revenue by business segment is presented in the table below. The HDMC segment accounts for the overwhelming majority of sales while the other two segments are still in their growth stage, offering diversification to the overall product mix.

Inside the HDMC segment, motorcycle sales cover 77.5% of revenue, while other categories like parts & accessories and apparel cover 22.5%. Apparel and parts also offer wide profitability margins, while serving as indirect marketing and promotion material for the company.

Currently HOG maintains over 1,200 dealerships around the world, with the U.S. still standing out as the company's primary market, with 600 dealership locations nationwide. E-commerce (online sales) are also growing stronger, especially in terms of motorcycle apparel and gear. Harley-Davidson motorcycles are primarily built in the United States, while the company also maintains production and assembly facilities in Thailand and Brazil.

A Strategic Shift

In early 2021, Harley-Davidson laid out its strategic transformation plan for the next half decade. The plan includes a focus on redesigning models, focusing more on innovation and catering via lifestyle products to both riders and non-riders.

Most importantly management will be profit-focused, capitalizing on the models that are selling well by investing heavily in them. At the same time the company will also expand more towards the adventure, middleweight cruiser and electric categories, aiming to capture a broader customer demographic. More international focus should also be a growth driver. What analysts and riders observe over the past couple of years is an attempt by the company to modernize its product range while also being careful to preserve its classic appeal.

The Industry

The motorcycle industry is highly competitive on a global scale with many highly-regarded brands competing for market share. Harley-Davidson appeals to a more nuanced customer base, offering a more classic, old-school range of motorcycles (even though it is recently beginning to diversify its strategy since 2020). Indian motorcycles, marketed under the company Polaris ( PII ) directly compete with Harley-Davidson. Japanese and European manufacturers like Yamaha, Honda, Suzuki, KTM, Ducati and others also compete for market share, focusing more, but not solely, on performance-oriented motorcycles. Chinese, low-cost alternatives are making a strong push in the market, especially in Asia and slowly in Europe. Electric-only brands are also beginning to surface in the industry.

The global motorcycle market is expected to reach revenue of $128.90B in 2023, on around 52.3M unit sales. Both unit sales and revenue are expected to grow for the better part of the coming decade. More specifically, sales are expected to grow at a 6.9% CAGR through 2027 (reaching $168.6B), while unit sales are expected to reach 65.1M in 2027. Most of the international growth is expected in the Asia-Pacific region and especially in India.

The motorcycle industry is also likely to turn more electric during the next decade, although at a much slower pace compared to cars. Currently, electric motorcycle represent less than 10% of the total sales.

? Growth Story Since 2020

Over the past 5 years Harley-Davidson has seen sales declining to reach the pandemic lows in 2020, to recover strongly later in 2021 and 2022. For the 2022 fiscal year, the company recorded revenue of $5.76B across all three segments, growing 7.8% YoY. Operating and net income have also increased substantially since 2020, reaching $0.91B and $0.74? respectively for 2022.

The company displays strong profitability, with operating and net margins standing at 15.8% and 12.8% respectively, both above sector averages. Interest expenses are also relatively low, enabling the company to deliver strong bottom-line results.

Harley-Davidson's balance sheet also gives out signals of financial health. The company carries a large cash balance of $1.4B (over 20% of market cap). HOG also has a current ratio over 2.0x indicating strong short-term liquidity, while a very low debt balance puts any long-term solvency concerns to rest.

For 2023, management guides for yet another year of mid-single-digit sales growth. Revenue is expected to increase between 4 to 7% for the Motorcycle Segment, while operating income is expected to see double digit growth.

Valuation Appears Attractive

At a $5.4B market capitalization, HOG trades at 0.96x Price/Sales ratio, which is rather reasonable both in historical terms and also in comparison to industry and sector averages (sector average P/S of 0.84x). The company also trades at the lower range of its historical P/E and EV/EBITDA multiples. Share buybacks and a decent 1.78% dividend yield also add to the valuation attractiveness of the company.

When looking at HOG's competitors it is hard to draw any conclusions regarding valuation metrics. Polaris, the parent company for Indian Motorcycles trades at a 0.7x P/S and a 10x TTM P/E ratio. Japanese manufacturers like Honda, Yamaha or Kawasaki trade at slightly lower multiples, yet they can't provide accurate comparison counterparts as they are heavily diversified and motorcycle sales represent only a part of their revenue. The same of course can be also argued for Polaris, yet given its North American roots and target audience, it should constitute a more comparable peer.

Final Thoughts

After all things are considered Harley-Davidson appears to have recorded a respectable financial comeback after the severe consequences of the Covid-19 pandemic, by refocusing efficient operations and strategically realigning the business for the future. The company is profitable and expected to keep growing (at least slowly) for the mid-term. It also carries relatively attractive valuation multiples. All that, coupled with a famous brand name with a loyal customer base and product quality, create a good investment opportunity. As such, I would rate HOG as a buy.

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