Why Harley-Davidson's Q2 Report Justified Wall Street's Pessimism

Harley-Davidson (HOG 1.92%) turned in its second-quarter earnings report Tuesday, and the basic numbers were about as bad as expected: Profits were almost 20% lower than a year ago.

In this segment from MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker discuss the situation at Harley, why the post-report conference call might be inducing optimism, whether this has become a value stock, its brand identity, and how President Trump is injuring its prospects in more ways than one. They also get a boots-on-the-ground report from podcast producer Dan Boyd, who recently purchased his first motorcycle. No, it wasn't a Hog, and there were a number of reasons why.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on July 23, 2019.

Chris Hill: Last week, Rich Duprey, who's one of our writers at fool.com, published an article under the headline, "How Bad Will Harley-Davidson's Second Quarter Report Be?" We got the answer to that. It's pretty bad. Profits for Harley-Davidson came in almost 20% lower than a year ago. Is there any silver lining to this quarter?

Bill Barker: Nope.

Hill: Well, OK, we can...

Barker: [laughs] The stock is up a tiny bit today. Not a lot was expected, as you can tell from the title of that story. And not a lot was delivered. I haven't read the conference call. Apparently that is being better-received than the numbers. The stock has jumped around from $33-$35 lately. It's at $35 at the moment. Maybe it'll settle at $36, $33 by the end of the day. The longer term is much more relevant. It's a stock which has been flat for the last year, and has been down over the last three, five years.

Hill: Yeah, I haven't seen the call either, but I'm assuming that Harley-Davidson's management is, well, saying things that are giving traders on Wall Street reason for optimism, because the stock opened at $33, and now it's about $36 a share. Is this a value stock at this point? Is this one of those things where if you think, I'll buy a couple of shares because I think they can turn it around -- right now, it's hard for me to imagine that the near-term picture for Harley-Davidson is a pretty one.

Barker: In answering, "Is it a value stock?" I would focus on one of the words that you used following that -- turnaround. Do you believe that there's a turnaround here? Where's the turnaround going to come from? Is it going to come from international, which had been a pretty decent part of the story for Harley over the last couple of years? It's run into a couple of problems. One is tariffs imposed by Europe. It has gotten an end around on that by opening up manufacturing in Thailand in order to supply to Europe. It's gotten approvals for getting out of the bulk of the tariff situation that way there. However, it's harder and harder to define what Harley is exactly as it gets a little bit away from the, "This is a U.S. iconic brand, everything's built in the U.S." Now it's not all built in the U.S. Having moved some of its manufacturing offshore, it has found the wrath of Trump, who has sort of said, "Why not just boycot Harley if they're going to build any of their bikes outside of the country?" They can't win with a business strategy. There's no foreseeable route currently to where they can or should build their bikes to satisfy everybody.

Hill: We're going to do a little boots on the ground research by going to our man behind the glass, producer Dan Boyd. Dan, you bought a motorcycle in the last six months or so, didn't you?

Dan Boyd: Yes, I did, Chris. I bought one in January. But I didn't buy a Harley-Davidson.

Hill: Do tell.

Boyd: I bought a Honda, a Honda Rebel 500, because I'm a beginner when it comes to being a motorcycle rider, so I didn't want to buy a huge, super fast, super expensive bike and kill myself. I wanted to buy something that would be smaller, manageable, easy to work on, and something where I could ease myself into being a motorcycle rider. I knew going into it I wasn't going to buy a Harley because Harleys are not exactly the byword for reliability or fuel efficiency. They are way more expensive than imported bikes of the same size. And then there's the Harley Fan Club, which is...hostile. Just, generally hostile. And I'm sorry, I'm probably alienating a few listeners here saying that.

Hill: Certainly the ones who own Harleys.

Barker: Hostile to who?

Boyd: Hostile to everyone. Oh, man! This is something that, as somebody who rides an important bike, people who ride Harleys, if they see somebody who's not riding a Harley, they are upset. But then there's subsets of Harleys that make other Harley riders upset also. Like, smaller Harleys are called Sportsters, and they're fine bikes, and a lot of times you don't need a big, giant, 1,100-pound bike to get around a city or something. But Harley riders who see Sportsters call them...well, they use derogatory terminology that I'm not going to use on the podcast.

Hill: Thank you!

Boyd: There are some very rabid fans of Harley. And Harley, for a long time, was a byword for individualism, for rebellion, for going against the grain. But now it's completely flipped. Harley is this big, corporate monstrosity who represents all these old, traditional values and stuff.

Motorcycling in general is in trouble. The European Commission just released a report saying that motorcycles are one of the least socially responsible ways to get around in Europe. There's a lot of disputes about that, but we don't have to go into that now. But, motorcycle sales are down across everything. Motorcycle riding, new riders, new bike sales, it's down, it's a worldwide trend. If you're going to be selling bikes like Harley does, that are more expensive than the competition, even though they're domestically made, it's going to turn off a lot of new riders from buying Harleys, because they're harder to get.

Hill: I remember talking to you back then, and I remember you talking to other people at the company who own motorcycles, basically getting their two cents. And I assumed at the time you were open to buying a Harley just because of my ignorance about motorcycles in general and the brand options, that sort of thing. But it sounds like, right out of the gate, you were like, "No, I'm going to talk to people here at the Fool, get their two cents, but I've already checked Harley off my list."

Boyd: For the most part, yeah, that's correct. If I had found a crazy good deal on Craigslist for a used Harley or something, maybe I would have done that. But I didn't. I wasn't about to buy a new Harley when I could buy the same -- the Harley Sportster 500 or 550 or something, I forget what it's called, is something like $1,000 or $1,200 more than the Rebel 500 that I got. And I actually got my Rebel on sale, too. I ended up saving like $2,000 instead of buying a Harley there. And if I'm going to buy a beginner motorcycle, which is what these smaller bikes are meant to do, I'm not going to spend $7,000 on it. I'll go with a $5,000 -- we're talking new, of course. Used bikes are way cheaper, but I wanted a new one. I don't know, it seems to me like it makes a lot of sense that their guidance is down, that their profits are down, their quarter was not that great.

Hill: I already was not optimistic about Harley's near-term future when you finished your analysis, Bill. But now, after hearing Dan, I think they might be in even more trouble. I know it's a data set of one, but that's some user experience that...I don't know, that just doesn't look good for Harley.

Barker: In Harley's defense, in terms of being a huge corporation, they've been getting smaller for a long time now. Maybe they sell as much product today as they sold 15 years ago, and they've got half the number of shares. So, in a sense, they are getting to where Dan wants to see them, which is more of a niche brand.

Boyd: I just want to say to any listeners out there, just because I didn't buy a Harley, just because I'm not a big fan of Harley-Davidson, it's not a personal attack. If you have a Harley, I am not saying that you're a bad person. I'm not saying that you're a hostile person. I'm just saying that there is somewhat of a stigma.

Barker: Dan is not looking to fight you, is what you're saying.

Boyd: I would agree with that, yes.