Harley-Davidson (HOG +2.61%) struggled for years with falling sales, the needle of its popularity creeping inexorably toward "empty" as generational changes ate into its once dominant motorcycle market position. Recently it has attracted bullish attention from several prominent Wall Street analysts, though many commentators and ordinary investors remain skeptical. While some rough roads may still await Harley-Davidson, there are at least four reasons why the bulls could be right about the company's chances to reshape itself for new success.
1. It's launching its new strategy at a good time
Looking to win back growth and reconfigure itself for the current market, Harley-Davidson announced a five-year strategic plan, dubbed the Hardwire plan, on Feb. 2.
This plan appears to aim at using digital marketing, developing the company's touring and three-wheeler segments, launching more electric motorcycles, starting used motorcycle sales, and improving branding to create "increased profitability and low double-digit EPS growth through 2025." Increasing "desirability," or finding a marketing approach better suited to younger generations, focusing on its 10 best markets worldwide, and expanding into a "global lifestyle brand" are among the methods it will use.
Image source: Getty Images.
Harley's efforts at transformation could potentially receive a boost from current market conditions. According to a May report by the Motorcycle Industry Council, or MIC, new motorcycle sales in the U.S. skyrocketed 37.2% in 2021's first three months, continuing a four-quarter streak of robust sales growth for the two-wheeled vehicles.
Not only are sales up, part of the rapidly growing trend of Americans seeking entertainment outdoors with RVs, motorcycles, and boats, but the motorcycles are being used, foreshadowing ongoing future purchases of new motorcycles or parts for existing ones. MIC president Erik Pritchard notes: "The pace of tire sales" shows "more riders are putting on more miles. We hope that indicates that riding is becoming a larger part of consumers' lives." Strong sales plus blossoming interest in motorcycling can only help Harley-Davidson in its efforts to attract new customers and remake itself as a lifestyle brand.
2. Its performance is improving
As the first initiatives of the Hardwire strategic plan begin having a concrete effect, and motorcycle sector sales boom overall, Harley-Davidson's results are already starting to improve. Its first-quarter 2021 results include a 10% year-over-year jump in revenue, while adjusted earnings per share (EPS) soared 273% compared to Q1 2020, reaching $1.68 per share. The company's greater efficiency in turning revenue into earnings is also highlighted by improvements in gross margin (34.1% versus Q1 2020's 29%) and operating margin (18.5%, more than doubling 2020's 7.7%).
A number of analysts have spotted the improvement in Harley's metrics and increased their price targets and ratings on the company. A Wedbush analyst cited research data indicating the manufacturer's April sales bettered 2020's monthly equivalent by 5% to 7%, and May sales increased by more than 10% year over year. The analyst expects this to translate to 40% to 50% second-quarter sales growth compared to 2020.
Lending support to the optimism of Wedbush, Baird, and other major analysts, the motorcycle maker increased its guidance for several key metrics:
|
Metric |
Previous Guidance |
New Guidance |
|---|---|---|
|
Motorcycle segment revenue |
20% to 25% growth |
30% to 35% growth |
|
Motorcycle operating margin |
5% to 7% |
7% to 9% |
|
Financial services operating income |
10% to 15% growth |
50% to 60% growth |
Data source: Harley-Davidson.
Harley also notes it's flush with cash, and will use this primarily to fund the Hardwire strategy and pay dividends, but may also repurchase shares later in the year to improve the quality of the remaining stock outstanding, increasing value for stockholders.
3. Its new CEO may bring a fresh perspective
Harley-Davidson's new CEO, Jochen Zeitz, became the company's chief executive in March 2020. He was CEO of German athletic shoe and clothing company Puma for almost two decades. Zeitz's dual European and American business experience could be useful in handling sales in the EU, where Harley-Davidson recently dodged having tariffs on its motorcycles raised from 31% to 56%. Zeitz's familiarity with business conditions in Europe could help with production and sales in Europe, one of the company's main markets. Zeitz identified Europe's importance during the Q1 2021 earnings conference call, saying "exiting Europe is certainly not an option" regardless of tariffs. He added, "as Europe comes out of a lockdown, there is certainly opportunity for more sales."
4. It has some good product ideas
Harley-Davidson is diversifying its product offerings with its financial services and its planned expansions into "lifestyle" branding and used motorcycle sales. Additionally, it seems to be adding new motorcycle designs to its lineup that may be more in tune with modern consumer preferences than the massive "hogs" of old. The company appointed its first chief electric vehicle officer, Ryan Morrissey, this March, and launched its LiveWire electric motorcycle brand. LiveWire motorcycles will appear at several industry shows in early July, and even after the brand is spun off as an independent entity, it will continue to share electric technology development and marketing with Harley-Davidson.
The LiveWire has already received positive reviews from some Australian outlets, with reviewers noting its ample torque and acceleration, along with the range-extending tech of its regenerative braking. Its styling is also praised, though its base price, just under $30,000, is well above other electric motorcycles, and it remains to be seen if the Harley nameplate can justify the premium.
Zeitz also noted the company's first "adventure touring bike," the Pan America, is an attempt "to build on our off-road heritage and to innovate into the high growth and attractive margin segment of adventure touring." Wedbush analyst James Hardiman described the response to the Pan America as "qualitatively better than any all-new model that we can remember."
According to reviews, the motorcycle's suspension handles various terrain competently and a seat with three different heights addresses a common complaint among adventure bike users, among other features. The MSRP is said to be under $20,000, putting it toward the upper end of adventure motorcycle prices but still several thousand dollars cheaper than some top-end adventure bike models from Ducati, BMW, and Triumph.
Image source: Getty Images.
Is Harley-Davidson a buy?
Overall, Harley-Davidson appears to have an opportunity to turn its fortunes around, with a new strategic direction, fresh leadership, and a booming market converging to help it with its swerve back to growth. It seems to be making an earnest effort to transform itself to meet modern market conditions. Headwinds include its high pricing and its current market image.
Nevertheless, its Hardwire five-year plan appears sound, its new products are breaking at least some fresh ground, and it has the good fortune to attempt its renaissance at the same time larger trends are causing a powerful, lasting upswing in motorcycle purchases. Investors willing to accept some risk in the consumer durables space may want to add some of Harley-Davidson's stock to their portfolio, with bullish indicators pointing the way to renewed future growth.
