Too often there has been a disconnect between the number of bikes Harley-Davidson ships to dealers and those it sells. Even when stocking up for new models, like this row of Dark custom bikes, the disparity between the two metrics is often large. Image source: Harley-Davidson.
Harley-Davidson (HOG 2.03%) may have beaten Wall Street's estimates on the top and bottom lines in the second quarter, and analysts at BMO Capital may have upgraded its target price on the motorcycle manufacturer to $66 a share, but investors should expect to be disappointed if they follow that advice and buy this stock.
At the moment, there's really little reason to be hopeful that Harley-Davidson can turn things around. From PE to price-to-free cash flow ratio, the stock is not overvalued and may indeed be cheap, there's a good reason for the discount: Harley-Davidson can't sell motorcycles.
Running on empty
For seven straight quarters -- almost two years running -- Harley has reported lower sales in the U.S. than it did in the year-ago period. It may still produce more bikes in a week than rival Polaris Industries (PII +12.24%) makes in a year, but it isn't bringing many new buyers to its dealers' lots.
Harley-Davidson's declining motorcycle sales may not be as bad as they were during the financial crisis, but they're not looking up, either. Data source: Harley-Davidson quarterly SEC filings. Chart by author.
Not that you'd know this by looking at the number of bikes it ships out every quarter. While sales continue to fall, more often than not, Harley-Davidson is shipping more bikes to its dealers and in fact has used this tactic twice in the past two years to just make it over the threshold for the guidance it had given on full-year shipments. Even though it wasn't selling more bikes, it was still loading up dealer lots with bikes at the end of the year.
Now it's reducing its guidance for bike shipments for 2016, lowering its prior outlook from 269,000 to 274,000 bikes shipped this year to 264,000 to 269,000 bikes, a 2% drop. That may not be enough.
Pick a number, any number
Harley's guidance for as many as 274,000 bikes was just so much wishful thinking. It had only sold 266,000 bikes in 2015, but now it suddenly thought it could sell as many as 3% more, even though there was no basis for that belief. Not only were Harley's sales falling, but the broader motorcycle industry was declining as well.
It's why Polaris Industries has been able to steal large swaths of market share from its rival. Sales of its Indian motorcycles have been growing at least at double-digit rates since it resurrected the nameplate out of bankruptcy three years ago, and even though the rate of growth is slowing, it was still able to see sales surge 20% in the second quarter. Even sales of its ailing Victory brand of bikes turned positive in the quarter.
So, the midpoint of Harley-Davidson's new shipment guidance is about equal to the number of bikes it sold last year. Considering the motorcycle manufacturer's penchant for pushing out more bikes even though sales are falling, it suggests investors should expect sales to be down yet again for the full year, hardly an environment for expecting its stock to rise.
Get ready to be disappointed
The big five percentage-point tumble in sales this past quarter is particularly worrisome as the second quarter tends to be the biggest for sales. The U.S. is Harley-Davidson's largest market, and second-quarter sales typically account for more than a third of the segment's full-year total and 22% of sales worldwide.
Harley-Davidson's shipment numbers usually have no correlation to their sales, which have been on a steady, two-year decline. Data source: Harley-Davidson quarterly SEC filings. Chart by author.
If we extrapolate Harley-Davidson's just-released sales numbers to all of 2016, we're looking at less than 160,000 bikes sold in the U.S. this year, or less than 250,000 bikes worldwide, a near 6% drop. There would be no reason to push 264,000 bikes out to dealers, let alone 269,000 of them.
Size matters
The one thing Harley-Davidson has going for it is time. Considering it still owns almost half the market of motorcycles 601 cubic centimeters or larger, it doesn't need to resort to dramatic initiatives to move bikes. It already eschews the discounting Polaris and the rest of the industry are undertaking to maintain or gain share, and it's been able preserve margins as a result.
Yet it's clear Harley's sales are still falling, its business is not turning around, and the broader industry is falling with it. That means there's no reason investors should pay attention to the big-bike maker's shipment numbers as they're often built on shifting sands and don't support the direction in which its operations are heading.
