• Harley-Davidson faces moderate growth (4.3% CAGR) as it balances legacy brand strength with challenges in attracting younger customers, reflected in a Hold rating amid a ~2% forward dividend yield.
• Management’s efforts, including ventures into electric bikes, face criticism for modernizing, risking alienation of its core 45-65-year-old demographic while struggling to appeal to youth.
• Valuation models suggest slight overvaluation with limited upside; the company’s survival depends on preserving its legacy rather than taking excessive risks for transformative growth.

Investing in Harley-Davidson (NYSE:HOG) is a bet on legacy survival, rather than on forward-focused innovation successfully captivating the youth (though management is trying). The company’s core customers are 45-65 year olds, and there’s nothing wrong with that. At approximately a fair valuation, a likely 4.3% CAGR in its enterprise value over the next five years, and a forward dividend yield of ~2%, my rating is a Hold. However, I admire the company and believe it will endure for years to come, albeit with moderate growth and periods of volatility amid changing global demographics.

Operations, Management, & Financials

Harley-Davidson is one of the world’s most famous motorcycle manufacturers, but in recent years the company’s reputation has become notably weaker. The company operates through two primary divisions, namely Motorcycles and Financial Services. The company’s most popular models include the Touring, Softail, Sportster, Street, and the electric LiveWire. Its Financial Services segment provides financing options and insurance products for dealers and retail customers. Recently the company has been venturing into electric motorcycles and bikes—a move some have criticized along with allegations that management have opted for a “woke” management style, prioritizing diversity, equity, and inclusion (‘DEI’) over meritocracy independent of class, age, race, and gender. Thankfully, the company has not operated a DEI program since April 2024 after heavy backlash from its community.

On the note of management style, the company’s current CEO, Chairman, and President is Jochen Zeitz, who has a tenure of over four years. Zeitz held prominent roles at Puma (OTCPK:PMMAF) and Kering (OTCPK:PPRUF) (OTCPK:PPRUY) prior to joining Harley-Davidson. Some criticize Zeitz for his modern and conscious approach to management. Indeed, it seems the company culture is going through a bit of a mid-life crisis, and as a result, many long-time fans are transitioning to other manufacturers, like Indian. Harley-Davidson has long dominated the North American motorcycle market, but Indian Motorcycle has been gaining ground, particularly under Polaris’ (PII) ownership. The two companies compete directly in touring, cruiser, and bagger motorcycles. Polaris states that Indian’s global market share has increased significantly over the past decade, to 13% in 2023.

Looking at Q3, and Harley-Davidson had a rough quarter, with global motorcycle shipments decreasing by 39%, and LiveWire electric motorcycles saw a revenue decrease of 41%. Zeitz acknowledged the challenging macroeconomic environment with high interest rates, but he expressed optimism about the company’s ability to post a better performance in 2025.

Unfortunately, in my opinion, there’s little to be bullish about here. Future growth rates are unlikely to be substantial. To be conservative but optimistic, we may forecast 3.5% annual revenue growth over the next five years. Though management is working to reduce dealer inventory and managing costs to improve profitability, we probably aren’t looking at Tesla (TSLA) levels of margin expansion. The five-year average EBITDA margin for Harley-Davidson is 15.87%, and its trailing 12-month EBITDA margin is 14.78%. I’ll be using the five-year average in my valuation model.

Valuation

Starting with trailing 12-month revenue of $4.52 billion and compounding this at a 3.5% CAGR over the next five years leads to a December 2029 revenue estimate of $5.37 billion.

At an EBITDA margin of 15.9%, the company will have a December 2029 EBITDA of $853.57 million.

The company has a forward EV-to-EBITDA ratio five-year average of 15 and a trailing 12-month EV-to-EBITDA ratio five-year average of 16.3. I will be using the approximate midpoint of these two figures, 15.65, as my terminal multiple. The result is a December 2029 enterprise value estimate of $13.36 billion. As the company’s current enterprise value is $10.84 billion, the implied CAGR over five years is 4.27%.

Harley-Davidson’s weighted average cost of capital is 5.01%, with an equity weight of 36.27% and a debt weight of 63.73%, with equity costing 13.21% and debt at 0.41% after tax. When discounting back the company’s December 2029 enterprise value estimated at $13.36 billion using the weighted average cost of capital as my discount rate, the present-day intrinsic enterprise value is $10.46 billion. This indicates a -3.49% negative margin of safety for investment against the current enterprise value of $10.84 billion.

Risks

Harley-Davidson’s primary customer demographic has traditionally been middle-aged men, particularly Baby Boomers and Generation X, with a significant portion of customers aged 45-65 years. It’s also struggling to attract a younger audience, even though management is trying. I think this is the biggest problem that the company faces—it’s simply too well-established as a brand of the past, an item of nostalgia, of legacy, almost of history. Some may say that Harley-Davidson can be saved, it can turnaround and become the next Suzuki (OTCPK:SZKMF) (OTCPK:SZKMY) or Honda (HMC), but that’s just not accurate. Indeed, it’s all about marketing. If the company goes too modern and “woke”, it will irritate its largest current customer base of 45-65-year-old men. If it fails to adopt somewhat of a modern approach, younger generations will generally not be amused. The company has to strike a careful balance if it wants to broaden its appeal, but I fear that it can’t do it without taking on excessive risk in the process of a major brand reimagining and turnaround. Indeed, if the company took on such a task, would Harley-Davidson even be the same company at the end? Arguably not.

Given that the brand definitely has an ‘aged’ feel after over 120 years in operation, alienating the younger audience, let’s look at some of the competitors that have captured the imagination of youth. Models like the Honda CB350 and CB750 are highly sough after for their affordability and ease of maintenance, and Kawasaki’s (OTCPK:KWHIY) (OTCPK:KWHIF) Ninja series is popular among the young for those drawn to racing heritage and aggressive styling. In addition, KTM is known for its high-performance off-road and street bikes, appealing to adventurous motorsports enthusiasts. From a macro perspective, the biggest issue might be the type of bikes that Harley-Davidson focuses on, which prioritize comfort, luxury (expense), and stability, over affordability, agility, and a sleek modern design.

Conclusion: Hold

My valuation model shows a minor overvaluation and only a 4.3% enterprise value CAGR over the next five years. As a result, my rating is a Hold, especially as Harley-Davidson only has a forward dividend yield of ~2%. The brand seems to be surviving, but I certainly would not say it is currently thriving. A successful reinvigoration would probably take a risky brand and management restructuring, which could leave the company worse off than it currently stands. Harley-Davidson has a rich legacy, and I think it will reward investors the best if management can maintain that rather than sacrificing its core customer base for speculative growth based on acquiring younger customers moving forward.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of TSLA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Harley-Davidson: The Bikes Might Be Fast, But The Investment Is Not appeared first on Up2info.com.

• Despite a global decline in retail motorcycle sales, Harley-Davidson’s Touring and CVO segments have performed strongly, especially in the U.S. and EMEA regions.
• Harley’s $400 million productivity program is paying off, helping fund new bikes like the RevMax and keeping their premium brand strategy intact.
• Wholesale shipments in the HDMC segment fell 39%, causing a 32% yoy revenue decline. Operating margins were cut in half, even with the company’s cost-cutting efforts.
• Their electric bike brand, LiveWire, lowered 2024 delivery targets and posted big losses, though it’s still the U.S. market leader.
• Given the mixed financial performance and valuation metrics, I maintain a hold rating, recommending investors monitor the impact of lower U.S. interest rates on motorbike demand.

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Harley-Davidson, Inc. (NYSE:HOG) has seen its share price trade sideways over the last 12 months.

Despite a global decline in retail motorcycle sales, the Touring and CVO segments have delivered strong results in the last quarter.

With the FED cutting interest rates down to 4.5%, investors should keep an eye on the Q4 2024 earnings release for improvements in retail sales in the low- to mid-range motorbike category.

This year, the company has been relying on the segments targeted toward affluent consumers (Touring, CVO, trikes), however, this could change in 2025 if interest rates improve consumer spending.

In this article, I will discuss the recent performance of the company, including the challenges and some of the strategic initiatives that could turn around the company in the long term.

In my opinion, it is too early to see all the benefits from their strategic initiatives, and therefore, I maintain a hold rating for this stock.

Business Overview

Harley-Davidson is a Milwaukee-based motorcycle company, well known around the world, that has been in business for well over 100 years.

They are renowned for manufacturing heavyweight motorcycles.

From an operational perspective, the company has three business segments:

1. Harley-Davidson Motor Company (HDMC): this segment focuses on the design, manufacturing, and sales of motorcycles, parts, accessories, and apparel.
2. Harley-Davidson Financial Services (HDFS): this segment provides financing and insurance products to customers and dealers.
3. LiveWire: initially an electric vehicle division launched in July 2021 and spun off in September 2022, Harley-Davidson still retains 74% of the ownership stake in LiveWire.

According to the last 10-Q, out of three segments, the HDMC (Harley-Davidson Motor Company) accounts for 83% of the sales revenue for FY 2023 while LiveWire only accounts for 1%. In other words, the brand is still highly focused on the ICE (internal combustion engine) division, which, I believe, is something that shareholders see with a positive eye.

In terms of sales globally, North America accounts for 54% and EMEA accounts for 17% of all sales in FY 2023. The other two regions, Asia and Latin America, account for less than 10% each.

Touring and CVO Segments Outperforming

The Touring and CVO segments performed really well despite a tough economic environment.

According to the last earnings release, the Touring segment grew almost 10% in the US for the first 9 months of the year. Moreover, this segment gained more than 4 percentage points in market share within its category.

The latest conference call transcript mentioned the Touring, the CVO and the trike motorcycle categories were the strongest segments in EMEA. However, the latest 10-Q did not provide a specific value for the revenue growth of these segments in EMEA.

In the Asian-Pacific region, Australia and New Zealand showed positive trends in the above segments despite an overall decline of 16% in the region. Again, in the 10-Q there was no specific breakdown in regard to the improvement driven by these two segments.

New Product Launches

The focus still remains on Touring, CVO and trike motorcycles. Innovations in the pipeline for 2025 are expected to drive revenue growth.

The RevMax innovation addresses the market’s dynamics and caters to the needs of younger riders and the broader audience with more affordable models.

LiveWire, the electric motorcycle subsidiary, still remains the market leader in the U.S., with a 69% market share at the end of last quarter.

Harley-Davidson has a $400 million productivity improvement program to underpin the innovations. It has been on track for the past 3 years and for the first 9 months of 2024 the program delivered $84 million in productivity improvements. The total achievement is $231 million for 2022, 2023 and 2024.

Harley-Davidson Financial Services Saw Decent Revenue Growth

In Q3, the revenue of this segment was over $26 million more than the revenue in the same quarter, last year. In fact, the revenue of this segment increased by 10% yoy as interest rates increased.

Commercial financing activities rose by 18% to reach $1.2 billion in Q3 2024.

As you probably know, the company does not run sale offers on their products to keep the brand reputation high; however, they do provide incentives in terms of flexible finance options and interest rates.

In fact, HDFS (the financial segment) provides dealers with these attractive financing options to sustain motorcycle demand during downturns​.

Riding on an Uphill Road

Out of all the regions, Latin America was the only one to post a 4% increase in retail sales.

In North America, retail sales declined by 10% yoy, but less than the industry average.

In EMEA, sales had the steepest drop by 23% yoy, followed by the Asian-Pacific region with a 16% drop in retail sales.

According to management during the earnings call, the overall global motorcycle market had a 13% decline in retail sales due to various reasons like high interest rates, sluggish economies and geopolitical uncertainties, to name a few.

This impact contributed to a decline of 13% in global retail sales of new motorcycles for Q3.

The company noticed that most motorcycle buyers come from high-income groups. During the earnings call, management pointed out that middle- and lower-income customers face challenges in affording motorcycles.

Looking at the latest financial results, the Harley-Davidson Motor Company experienced a 32% decline in revenue yoy.

Even more concerning is the 39% yoy decline in wholesale shipments. This decline reflects the low demand for their motorcycles, with dealerships reducing their inventories significantly yoy.

Other concerns include the 49% decline in consolidated operating income, with HDMC operating income margins falling from 13.5% in Q3 2023 to 6.3% in Q3 2024.

This decline in margin happened despite the $27 million yoy reduction in operating expenses. The improvement in productivity was mainly driven by the HardWire strategy, which YTD has delivered $84 million in savings.

Another cost-saving target is to cut inventory by an extra 20% by year-end. As I mentioned previously, inventory dropped by 13% in Q3 2024 compared to Q2.

Moving onto other headwinds, management revised downwards the guidance for the LiveWire segment, now expecting deliveries to be between 600 and 1,000 units for FY 2024.

Additionally, the LiveWire segment had an operating loss of $26 million in Q3 alone. This year, LiveWire went through a restructuring program to reduce cash burn by 40% in 2025. The initiatives include centralizing operations in Milwaukee and cutting its workforce by 30%.

Fundamentals Overview

From the income statement, we can see a major decline in the past quarter, particularly in operating income (82.7% yoy) and in net income (40% yoy).

As I mentioned above, the overall market decline in motorcycle sales had a direct impact on the total revenue of the company. In fact, the total revenue decline in the last quarter was 25.7% yoy.

From a financial health perspective, the balance sheet shows their total debt is quite high compared to their cash and short-term investments. To be specific, the total debt to cash and ST investments ratio is about 3.3 which leads us to a net debt of $5.46 B.

In my opinion, the company still has enough liquidity to cover their debt. Both the quick ratio and the current ratio are above 1 despite the relatively low cash reserves.

As I mentioned before, the company has been struggling with inventories due to lower overall demand. Currently, a good amount of their current assets is locked in these inventories.

Moving on to the cash flow statement, the increase in operating and free cash flow looks quite promising. Since the start of the year, the company has seen double-digit growth in both operating and free cash flows.

In my view, despite the overall decline in demand for motorcycles, especially in the US, the fact that the company has been able to generate close to $1 billion in operating cash flow is quite encouraging.

However, I cannot rate this stock as a buy at the moment, as the income statement looks unfavorable compared to the cash flow statement. As soon as I see revenue growth followed by an improvement in profitability, I will revisit this stock and reconsider my rating.

Valuation

A quick look at the valuation section of the company shows a mixed picture with some valuation ratios, including a P/E of 7 and a P/CF of 4 (TTM) trading below the median of the consumer discretionary sector.

On the other hand, I can see other ratios that are trading slightly above the sector median, including EV/EBITDA (TTM) which stands at 12% above the sector median.

The company pays a quarterly dividend; however, the dividend yield is at 5% below the sector median. Therefore, I do not believe this is an attractive yield to compensate for the dire financial results of the company this year.

Conclusion

After considering the factors discussed in my thesis, I rate this stock as a hold.

On the bright side, the Touring, CVO, and trike segments outperformed in key regions, gaining market share even as global retail motorbike sales declined. They are already seeing positive results from the $400 productivity improvement program, with $84 million in productivity improvements this year alone.

Furthermore, the RevMax innovation pipeline and LiveWire’s dominant U.S. market share show promise in attracting enthusiasts and more diverse riders.

On the flip side, wholesale shipments for the Harley-Davidson Motor Company declined by 39% leading to a 32% decline in revenue for this segment. Operating income dropped by 49% yoy, and operating margins slashed in half despite cost reductions. LiveWire continues to underperform, with a reduced FY 2024 delivery guidance and mounting losses.

From a valuation perspective, the P/E ratio (TTM) of the company looks quite decent, trading 60% below the sector median. Other ratios, mentioned above, seem to indicate that the company is fairly priced when compared to its sector. Therefore, I maintain a hold rating and I recommend investors keep an eye on the impact of lower interest rates in the U.S. on the demand for motorbikes, particularly the ones in the low- to mid-range.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Harley-Davidson: An Uphill Ride Powered By Its Premium Segments appeared first on Up2info.com.

• Harley-Davidson is a well-known brand and a profitable business in a growing market.
• However, since 2014, the company has lost market share and is selling in total about half as many bikes as at the top.
• The lower stock price reflects that. However, I do not think it has fallen enough to offer a high enough margin of safety for a ride.

Harley-Davidson, Inc. (NYSE:HOG) has been coping with a set of challenges not just over the last few years, but in fact even over the last decade. Harley has not achieved new record sales since 2014, despite inflation, while pressured margins have led to disproportionately lower earnings and cash flows.

However, not known to many, Harley-Davidson has been a very aggressive cannibal, meaning it has bought back a big chunk of its stock outstanding. As long as a business is relatively stable, it does not even have to be a growth story to achieve great returns for shareholders.

On the surface, Harley-Davidson still not being dead, could be a lucrative opportunity, at least in the short- to medium-term, as it has announced a buyback of the equivalent of 20% of its outstanding equity.

However, there are reasons why I am not euphoric.

Why this is rather not a no-brainer at a P/E of 8x

Harley-Davidson was founded in 1903, while today’s company has been publicly tradable since 1986.

Today, it is still mainly a combustion engine motorcyclist company with a financing arm. Its third pillar, called LiveWire, is the attempt to modernize the company by offering electrically powered motorcycles. However, this adventure has been loss-making so far, and it is rather questionable whether a typical Harley customer will switch to a soul-less noiseless alternative. Even if, this would more likely cannibalize existing products and not necessarily ignite a whole new growth story.

Leaving this aside, below on the stock chart we can see as a first impression, that the company has been struggling since at least 2014, when its last significant high was made – almost double as high as today’s stock price. To make it even worse, Harley-Davidson’s stock is trading where it was 24 years ago, which didn’t even have anything to do with the Dotcom bubble, as you can see the stock did not experience any bust of the same, continuing to rise as if nothing were.

Though of course not identical, this price chart instantly reminded me somehow of tobacco stocks with their troubled legacy businesses. In the case of Harley-Davidson, we do not need to make a secret out of it that the brand has been having difficulties to expand.

However, contrary to the belief of many, it has nothing to do with not enough new, younger customers buying a Harley, as the average rider is 45 years of age – almost exactly the same as ten years ago – as the company showed during its recent earnings call presentation.

The stock of Harley-Davidson has fallen over the last decade due to structural issues. When looking at the number of registered motorcycles in the US, we can see that at least until 2021 the total number has been growing, even despite the 2020 and 2021 lockdowns.

I am purposefully looking here at the US market, as Harley there at least in the past had an impressive market penetration with more than every second motorcycle being a Harley (which wasn’t and isn’t the case in other markets). Besides, Harley is generating about two-thirds of its sales in the US.

Looking into the latest annual report for the year 2023, we indeed find that Harley has lost massively on market share, falling even below 38% for new registrations. Notice also the decline in Europe below 5%.

This speaks a clear language. Harley, despite still having a recognized brand, has not been able to ride along the growing market it is operating in. At the peak in 2014, 167k Harley machines were registered in the US. Last year, the number fell below 100k.

Even though I couldn’t find any average selling price numbers, it is safe to say that a unit drop of 48% is hard to digest – this would have required a price double only to keep sales stable. I know the business is not just about sold new units, but also about spare parts, accessories and other stuff, but that’s the main driver, also influencing the other categories.

To put more meat on the bone after this birds-eye overview, Harley-Davidson has seen its sales still being ~5% below where they were in 2014 – 6.2 bn. USD then vs. 5.9 bn. USD in 2023.

This even masquerades the details a bit, as motorcycle sales are even 11% lower than a decade ago, while financial services brought in 50% more revenues!

At the same time and not necessarily surprising, operating margins and earnings have seen even a bigger decline which makes sense for a manufacturing company with certain fixed costs, but fewer sold units.

So, a troubled and seemingly out-of-favor company with sales and earnings headwinds has seen its stock decline – as it looks like not undeserved.

There are even quite a few bull arguments worth talking about.

Here are some bull arguments

A few weeks before the earnings call, a new general investor presentation has been uploaded which includes an interesting sheet.

It shows that profitability per unit sold has been on the rise again. Despite still being below the 2014-high, in 2022 (I don’t know why they haven’t shown 2023 figures as we’re in summer 2024…) the company has reached the second-highest level for this period which is encouraging that despite less units, margins could be improved again. At least on a per-unit basis.

Looking at the balance sheet, one needs to consider that the financial arm stretches it – taking the respective debt and financing assets (loan receivables) of the financing division out again, the company even has a net cash position of give or take 400 mn. USD – so it is not in imminent danger of a liquidity collapse.

Let’s look next at the cash flow statement. With operating and free cash flows (OCF – CAPEX or higher blue bar than black) having always been strongly positive over the last ten years, this is a financially sound company.

Also on the positive side: buybacks. Harley-Davidson has been a pretty aggressive repurchaser of its own stock. I mean, really aggressive.

When I hear that one of those big techs has spent billions on buybacks in the double-digits (billions of USD), I can only shake my head, as the bottom line is often that big headlines don’t automatically result in meaningful share count reductions. Famous short seller Jim Chanos recently posted this on X (Formerly Twitter):

Not so regarding Harley. Over the last ten years, share count was reduced by not less than 37% on a fully diluted basis. Since 2010, it’s even 42%.

And now recently, management announced a new one billion USD buyback program – that’s 20% of the current market cap! The only caveat: the program spans until the end of 2026, i.e., over two and a half years. Nonetheless, this is an impressive figure many only can dream about.

With annual free cash flows of somewhere between 500 mn. USD and even more in the recent past (and the dividend not costing them more than 100 mn. USD annually after the cut in 2020), this looks like an easy hurdle to comfortably step over.

Fair value estimation

The negative development since 2014 has led to a compressed stock price and also valuation multiples. Today, one can buy the stock at an EV / FCF of 8-9x (4.5 bn. USD / 0.5 bn. USD) or a free cash flow yield of 11-12% which sounds pretty attractive.

However, the problem is that we are currently past the economic up-cycle. Harley, being a cyclical business, already adjusted its guidance lower with the last set of results. Sales will be down between 5-9% while the previously rising operating margin is also expected to turn southwards again.

While they haven’t given any FCF guidance, it is rather to be expected that in the core non-financial business cash flows will likely also be negatively affected.

Adding to this, despite management still seeing operating income for the financial services division being flat to even up by 5%, there is also bad news on this front as credit losses are on the rise as well as receivables and allowances (money put aside for potential credit defaults). When these measures rise, the consumer is clearly not in the best shape.

So in practice, this means, depending on how the current new environment plays out, it is absolutely possible that the current guidance will have to be lowered again. And quite honestly, an FCF yield of only 11-12% does not offer a high enough margin of safety for my taste, as we are dealing with a melting ice cube. Having these two negative forces, organically from within and externally from the side of the economy, this seems to be a risky adventure.

Despite the aggressive buybacks, these efforts have done rather little to the stock price, except for some cosmetics. What I like to do when share counts change dramatically – whether up or down – is to take a look at the development of the market cap as I view this as an answer to whether the whole business has made a jump forward or whether it’s in a bigger decline than the stock price might show. Unfortunately, but not surprisingly, the picture looks rather grim for Harley-Davidson:

The company’s market capitalization is near its lowest level in 15 years, when we exclude the dips in 2009 and 2020. While the company does not have to grow to justify its current valuation multiples (which is not imaginable for me at the moment) – buybacks have only slightly held up the stock. Over the last ten years, the stock is down by 42% and over the last five years up by just 17%.

I did a few DCF (discounted cash flow) scenarios to answer this final question. My assumptions are:

• starting FCF of 500 mn. USD.
• growth rate for the first ten years (including buybacks): -5%, 0% and +5%.
• terminal growth rate 0%.
• discount rate: 15% (in this case, I want a higher margin of safety than the usual 10%).
• 139 mn. diluted shares outstanding as of now.

The resulting fair values are 17.50 USD (-5% growth per share), 23.20 USD (0%) and 31.37 USD for the upside case.

As the stock is trading currently at 37 USD, we are unfortunately very far away from this range, where the mid-point of 23-24 USD might seem plausible for a high enough margin of safety to consider a ride.

Let’s see, how things evolve! With the business momentum now tilted to the downside again, I tend to stay away from this story. I’ll put it on my watch list, for maybe there’ll come a time when the company will be declared dead.

Risks to my thesis

It is entirely possible that the economy recovers quicker than thought. Likewise, Harley’s transition to electric rides could be an under-appreciated success story.

With a clean balance sheet and a big buyback program and assuming cash flows don’t crater, the buyback effect alone could be meaningful by retiring a big part of stock outstanding.

Conclusion

Harley-Davidson is a well-known brand and a profitable business in a growing market. However, since 2014, the company has lost market share and is selling in total about half as many bikes as at the top. The lower stock price reflects that. However, I do not think it has fallen enough to offer a high enough margin of safety for a ride.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Buyback Monster Harley-Davidson Not Appealing Despite New Huge Repurchase Program appeared first on Up2info.com.

• Harley-Davidson, Inc. is likely a deep value opportunity after its sluggish performance in the past three years.
• We think the company’s valuation metrics have realigned.
• Our judgment call of Harley-Davidson’s key drivers suggests a fundamental inflection point might emerge.
• The firm’s operating metrics have improved since our latest coverage.
• Risks such as questionable performance from LiveWire shouldn’t be neglected. However, we are net bullish, and, therefore upgrading the stock to a Buy.

This article revises our outlook on Harley-Davidson, Inc. (NYSE:HOG) and its stock. We last covered the asset in June 2021, stating that it outperformed its fundamental capacity. We were correct with our call. However, numerous systematic and idiosyncratic variables have shifted since then, prompting us to revisit our stance on Harley-Davidson.

After revisiting the stock, we decided to upgrade Harley-Davidson to a buy from our previous sell rating; here’s why.

Recent Performance

As shown in the following diagram, Harley’s stock has suffered in the past three years. In our view, Harley’s demise was driven by systematic factors such as the inconsistent demand for durable goods. Moreover, when we covered Harley in June 2021, its stock had questionable valuation multiples and foggy operational metrics, which likely contributed to its slump.

With all that mentioned, Harley-Davidson has reached a much different price level since our latest coverage. In addition, key operating dynamics have shifted. Let’s dive into Harley’s fundamentals.

Assessing Harley’s Q1 Earnings Beat

A good way to measure Harley’s fundamental aspects is to start by reviewing its latest earnings report. Harley-Davidson triumphed in its first quarter, delivering a revenue beat of $128.56 million and an earnings-per-share beat of 18 cents.

Let’s discuss Harley’s top line. Other metrics are discussed in the following section.

Most of Harley’s recent momentum stemmed from its financing and insurance unit (HDFS), which grew by 12% year-over-year in the last quarter, leading to an operating profit margin of 21.7%.

Furthermore, Harley-Davidson’s motorcycle and parts sales dipped by 5% year-over-year, giving the segment an operating profit margin of 16.2%. Moreover, LiveWire, which is Harley’s electric motorcycle segment, dipped by 39%, settling at an operating loss of $29 million.

So, what do we make of Harley’s sales trajectory?

Well, consumer confidence has been low around the globe. Therefore, we don’t think its lower year-over-year sales trajectory is structural. In addition, the company achieved a record unitary profitability of $3700 (ex-LiveWire) in 2023, suggesting it has inflation pass-through abilities. We think motorcycle sales will recover once consumer confidence recovers, which is likely to occur when interest rates drop (because Harley-Davidson sells durable goods that are often financed).

Furthermore, we anticipate Harley-Davidson’s credit and insurance departments to hold up throughout the economic cycle, presenting sustainable growth. Although the breadth of global yield curve inversion implies that a broad-based drop in interest rates is inevitable, we think higher net loan margins are probable due to a contemporaneous rise in credit spreads (credit spreads and interest rates are usually inversely related).

Although we are positive about most of Harley’s top-line prospects, we remain concerned about LiveWire. The segment was set up to attract an alternative consumer base and provide Harley-Davidson with a way out of traditional motorcycles. However, LiveWire’s sales haven’t been impressive, raising the possibility that capital expenditure inefficiencies might occur.

Key Metrics

Harley-Davidson’s motorcycle profitability shrunk to 16.2% in Q1, showing a retracement from its record unit profitability in 2023. Nevertheless, we think Harley’s strong branding will sustain its proportionate inflation pass through. Additionally, we expect the firm’s supply-chain costs and operating expenses to decrease in the next quarters amid a drawdown in global inflation.

Furthermore, Harley-Davidson has grown its broad-based market share in the U.S. by 400 basis points, primarily due to its touring motorcycles. Although we don’t think the brand will resonate in Europe, we won’t be surprised if Harley grows its market share in developing regions such as Africa and Latin America. If sustained, the firm’s illustrious market share will likely enhance Harley’s bargaining power over suppliers and pricing power in the market.

Despite being positive about most of its financial metrics, we would like to flag Harley-Davidson’s high inventory levels. As mentioned, we are in a global disinflationary environment, which could impact inventory values, leading to losses via impairments.

Lastly, we like Harley’s best-in-class Degree of Operating Leverage ratio. The ratio measures the degree of EBIT sensitivity to sales, indicating that Harley would experience higher EBIT margin growth than most of its competitors in the event of broad-based industry sales growth.

Potential Shareholder Returns

Absolute Valuation

We used a price-to-earnings expansion formula to set a price target for Harley-Davidson’s stock. Although an isolated and somewhat simplistic metric, the P/E expansion ratio holds validity among financial analysts as a parsimonious measure of a stock’s value.

According to the formula, Harley-Davidson could reach $54.94 per share by December 2024, placing Harley in undervalued territory on this basis alone.

Aside: Harley-Davidson’s stock closed at $33.67 per share on Friday, 21/06/2024.

Click to enlarge

Source: Author (Data from Seeking Alpha)

Relative Valuation

Another alternative way of examining Harley-Davidson’s valuation is through a relative valuation, which compares its current and past valuation multiples. I highlight this methodology because Harley is a cyclical stock, meaning its point-in-time versus its averaged multiples paint a clear picture. The following diagram shows that Harley-Davidson’s salient multiples are below their 5-year averages, suggesting the stock is at a cyclical discount. In fact, Harley had a GAAP-adjusted P/E multiple of 38.92x when we last covered it, illustrating the disparity between its valuation then versus now.

Dividends

Harley-Davidson has a forward dividend yield of 2.05%, which we don’t think is high enough to add a floor to its stock’s price. However, we believe that Harley’s dividend adds a nice touch as it provides a diversified form of return. Additionally, we think that Harley-Davidson’s payout of 14.83% is low, suggesting latitude exists for future dividend hikes.

Consolidating Harley’s Risk Factors

I mentioned some of Harley-Davidson’s risk factors throughout the article. Nevertheless, I wanted to consolidate them in a discreet section to add balance to the article.

Firstly, as mentioned, we remain concerned about LiveWire. The electric motorcycle industry is forecasted to grow by 21.21% until 2030, meaning systematic support is intact. As such, we are disappointed by LiveWire’s realized results, as we think Harley needs to tap into a newer generation via rapid growth in electric motorcycle sales.

Furthermore, Harley-Davidson is struggling to grow its EMEA market share. We have doubts about the company’s ability to tap into European and Asian consumer bases as we see a disparity between brand preferences in North America and the EMEA. This might ultimately lead to inefficient CapEx.

Lastly, as shown below, and compared to the SPY ETF (SPY), Harley-Davidson has a high monthly value at risk at the 95th degree of confidence, conveying that Harley has lost at least 15.05% of its market value in 5% of its traded months.

Final Word

In our view, it is an excellent time to buy Harley-Davidson’s stock as it has shed a large amount of value in the past three years, realigning its valuation multiples. Moreover, Harley-Davidson’s fundamental aspects seem set to establish consistency in the coming years.

Although risk factors such as underwhelming support from LiveWire and slowing year-over-year sales growth exist, we are confident about the stock’s prospects.

Consensus: Buy/Market Outperform

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Harley-Davidson: Time To Buy The Dip? (Rating Upgrade) appeared first on Up2info.com.

• Harley-Davidson is a legendary motorcycle brand with a controlling interest in LiveWire, an all-electric motorcycle company.
• The stock has experienced a pullback, presenting a potential buying opportunity.
• The CEO, Jochen Zeitz, has a reputation for turnaround situations and is expected to continue making progress for the company.

Harley-Davidson, Inc. (NYSE:HOG) is a legendary motorcycle brand and, for many people, and an icon that represents America. This company has been in business since 1903. In addition to the Harley-Davidson brand, which is known for having a very memorable exhaust note, this company owns a controlling interest in LiveWire Motorcycles (LVWR), which are all-electric. LiveWire has been producing losses, but it is growing rapidly. Harley-Davidson shares have experienced a pullback from recent highs, so this could be an ideal buy the dip opportunity (as long as we avoid a recession).

One factor to keep in mind is that Harley-Davidson hired Jochen Zeitz for the CEO position in 2020. Mr. Zeitz has a reputation for turnaround situations because in the past, he was brought in to turnaround Puma (an athletic apparel company) and he succeeded. So far, his tenure at Harley-Davidson seems to be going well, and hopefully, he can build on the progress in the coming years.

The Chart

As the chart below shows, this stock bottomed out at around $25 per share late in 2023. It then surged up to about $44 per share in March. More recently, it has had a pullback, and then the plunged after Q1 earnings were released. This gives investors a better buying opportunity, well off the highs. The 50-day moving average is $39.74 and the 200-day moving average is $34.44. The stock is now trading at just around $33.00 per share.

Q1 2024 Earnings

For Q1 2024, Harley-Davidson reported earnings of $1.72 per share, with revenues coming in at $1.73 billion. The revenues were impacted by a 7% decline in global motorcycle shipments, which was partially offset by a 6% increase in the North American market. These numbers were in line with expectations, so the drop in the share price seems very overdone. The selling pressure was probably exacerbated by the market plunge on Thursday, April 25th, which was the same day this company reported Q1. Riding season is just getting started, so I think quarterly results will improve going forward, and so could a relatively new line of touring motorcycles such as the “Street Glide” and “Road Glide”. There may have been some concern that these new models are not selling as quickly as hoped, but again, it is still early in the riding season, so I think there is plenty of time for sales to kick in this year.

Recent Developments With Harley-Davidson

On April 23, 2024, an analyst at Morgan Stanley (MS) gave this stock an overweight rating and set a $50 price target. The analyst seems to think this company is putting in the right strategies and believes the stock is undervalued.

On April 8, 2024, Harley-Davidson announced it ratified contracts with all unions at its Wisconsin facilities.

Earlier this year, Harley-Davidson announced a new financing option for customers which gives them an option to lease a new motorcycle. This could help spur more transactions and keep the competition at bay.

Earnings Estimates And The Balance Sheet

Analysts expect Harley-Davidson to earn $4.21 per share in 2024, with revenues coming in at $4.69 billion. For 2025, earnings estimates are at $4.70 per share on revenues of $4.89 billion. For 2026, estimates are expected to rise again to $4.98 per share on revenues of $4.85 billion. These estimates suggest a price to earnings ratio of around 8 times earnings for 2024, and less than 7 times the estimates for 2026. That is very undervalued when considering that the S&P 500 Index (SPY) trades for about 21 times earnings.

On the balance sheet, Harley-Davidson has $7.2 billion in debt and $1.5 billion in cash.

The Dividend And Share Buybacks

In February 2024, Harley-Davidson raised the quarterly dividend from $0.1650 per share to $0.1725 per share. This dividend payout totals $0.69 per share on an annual basis, and it provides a yield of about 1.8%.

As shown below, this company has a shareholder friendly capital allocation plan that includes share buybacks and dividends. It paid $189 million in dividends to shareholders in 2022 and 2023. It also completed $674 million in share buybacks in those two years, which represents about 12% of the outstanding shares.

Potential Downside Risks

There are some signs that the economy is slowing down under the weight of high interest rates. There are also signs that consumers are starting to feel some pressure that comes from higher interest rates and consumer debt like credit cards, which are at very high levels. Credit card and auto loans have been seeing increased delinquencies. The Federal Reserve is trying to create a soft landing and avoid a recession, but historically this has not often been successful.

In the event of a recession, unemployment will grow and consumers will curtail spending on big ticket items like motorcycles. I would say a recession is the biggest potential downside risk, and if that occurs, I would be more concerned with the debt on the balance sheet becoming a potential downside risk. The balance sheet seems manageable now, but if sales and earnings decline significantly in a recession, it could impact credit ratings as well as what investors are willing to pay for this stock.

In Summary

I am buying the pullback on this stock because it appears undervalued, and it is a legendary brand name. However, I won’t buy a full position in this stock because I feel the U.S. economy could go into recession, in which case Harley-Davidson shares will likely drop and allow me to dollar-cost average to a lower level. The CEO looks like the right person to bet on, and the company has a shareholder-friendly capital allocation program that seems likely to continue.

No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of HOG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Harley-Davidson: The Earnings Plunge Is A Chance To Buy This American Legend For Pig Feed appeared first on Up2info.com.

• Harley-Davidson, Inc. stock has been stagnant, moving sideways over the past five years, great for trading, awful for investing.
• The company is facing challenges in reaching younger generations and dealing with high financing rates for new bikes.
• For Q4, revenues were down in every segment other than financing.
• Margins have also been compressed thanks to volume and promotional activity.
• 2024 earnings likely will fall from 2023.

Harley-Davidson, Inc. (NYSE:HOG) is a stock we have traded a number of times, but have not checked in on the company in many quarters. It was asked about today in our investing group, and frankly, the stock has just stalled. What we mean is that it simply has moved sideways.

What we see in the chart above is a stock about flat over 5 years. There are notable dips and rips for trading. Of course, the COVID dip was an anomaly, but it took the company several quarters to rebound. Then, as you see, the stock spiked into the $40s, which were then sold off. So, as of now, we had a recent decline into the 20s in fall of 2023.

We suspect this trading range will persist, given the stock’s trading history, and the fact that operational performance is under pressure. The company has struggled reaching younger generations, and is also faced with consumers dealing with high financing rates to purchase a new bike. There is a lucrative parts business, and riders may be keeping bikes on the road longer, helping to preserve sales which, despite the stock action, are relatively holding up, but still down. The company is facing margin pressure to boot.

We think HOG shares have a limited upside to the $40 level in good market conditions, and downside to $25 if the market gets nasty again. We are neutral here long term, but in the short term for traders, we get modestly bullish here in the low $30 range to the high $20’s range for trading purposes only. The Q4 report had key strengths and weaknesses to be aware of.

Harley-Davidson’s revenue

As experienced traders who guide and offer opinion to our investors, we will tell you that HOG is a trader’s stock. Sales pressure has mounted but was better than expected in Q4. Overall revenues were down 7.9% year-over-year, from $1.14 billion to $1.05 billion. This surpassed consensus by $175 million, while annual 2023 sales were up 1% from 2022.

Discussing Harley-Davidson’s Q3 sales

Sales of the actual motorcycles drive the bulk of revenue, but Harley-Davidson also makes some significant revenue from associated parts, as well as accessories. And while rates are high, there are added streams of cash flow from their financial services. The company is in its third year of a long-term transition plan to focus on the highest margin products and to breach new markets. Admittedly, it has been a slow process, and reaching younger customers has been a challenge, but is a key goal of the company. The new model year, however, has been well-received thus far according to management commentary.

Revenues were down in every segment, and down in most operating regions. In Q4, there was a 13% decrease in motorcycle sales, driven by lower shipment volume of 29.5k units from 34.0k units last year. Revenue from motorcycles was $583 million, compared to revenue of $666 million last year.

The other segments were also pressured. Sales were down 14% in parts and accessories, as there was lower retail motorcycle volume. Apparel revenues fell 21% to $57 million, while licensing was down 27% to $8 million. Finally, the so-called “other revenues” also dropped 22% to $14 million. The pressure is on.

Global retail sales of Harley-Davidson motorcycles were down 11% versus prior year. North America retail performance was down 9%, declines driven by the aforementioned high-interest rate environment and the discontinuation of legacy Sportster at the end of 2022 in the region. In EMEA, the drop was a whopping 22%, driven by weakness in the French and German markets. In APAC, there was a drop of 10%, driven by weakness in the Australian and New Zealand markets. However, Latin America sales increases of 46% were driven by growth in both Brazil and in Mexico. Unfortunately, the volumes in this region make up only about 2% of overall bike sales.

The one big positive is that there was a 15% increase in financial services revenue to $246 million.

Expenses and margins

The reason we are not outright “buy”-rated here is the margin compression. We can stomach declining sales during periods of stress, but the heavy promotion to generate sales hurt margins. Harley-Davidson for years was working on manufacturing optimization to help control expenses and improve margins going forward, but the operating environment has softened. Gross margin was down 360 basis points in Q4 due to lower volume, higher sales incentives, and other manufacturing costs, more than offsetting the benefits of shipment mix and lower raw material costs. The Q4 operating margin fell by 2.1 points, although general operating expenses were lower in the quarter due in part to LiveWire transaction costs in Q4 2022.

This all combined to lead to a net income of $26 million, or $0.18 per share. This was down from $0.28 a year ago, but was better than expected given the overall higher sales. For the year, EPS was $4.87, down 2% from 2022. So there is value here, even if EPS has stalled.

Looking ahead

Is Harley-Davidson, Inc. stock a value trap? In the near term, the biggest catalyst to boost sales will be in our opinion rate cuts, provided they are not done so because the economy has tanked. Medium term, the company must continue to pursue the younger generations. This is the greatest challenge.

Looking ahead, expect more sideways action in Harley-Davidson, Inc. stock, as sales are looking to be flat for 2024, if not down single digits on a percentage basis. The same goes for operating income. Future growth may come from LiveWire, the electric bikes, and sales are looking to be over 1,000 units, but this will come at significant operating losses for several years. For the year, we expect EPS falls from 2023, so, we foresee more sideways stock trading. The timing and circumstances surrounding rate cuts will be a wildcard, but we are looking for EPS in the $4.20-$4.70 range, putting the valuation here at 7.5X FWD earnings. The value is there, but more multiple compression is likely for Harley-Davidson, Inc. shares if an inflection in sales and margins is not realized or in sight later this year.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Harley-Davidson Stock: This Hog Has Stalled appeared first on Up2info.com.

• Harley-Davidson is at an inflection point and making progress through its five-year plan, ‘The Hardwire’, with a focus on growth and profitability, particularly in electric motorcycles.
• The company is targeting younger consumers to expand its customer base and stay relevant in the market.
• Harley-Davidson has shown improvements in operating margins and cost savings, and has a strong balance sheet to support its growth strategies.

Investment Thesis

Harley-Davidson, Inc. (NYSE:HOG) is a recognizable name synonymous with motorcycles in the United States and around the world. Well-known and well-respected by motor enthusiasts, I believe Harley-Davidson is an inflection point where it is seeing significant progress through its five-year plan, ‘The Hardwire’, announced in 2021. The company’s laser focus on growth and profitability particularly through the growth in electric motorcycles is showing signs of potential and its new CEO, Jochen Zeitz, has a history of leading turnaround stories to evolve brands and get them on track. This should help Harley-Davidson resonate with younger consumers, as they have traditionally focused on an older demographic of people. With a potentially successful turnaround ahead, I believe there is significant room for the stock to see a rerating in its multiple and for the company to unlock shareholder value, should it continue to execute on its growth strategy and focus in on driving profitability through its multi-year strategy.

Business Overview

Founded in 1903, Harley-Davidson was founded by two brothers, William S. Harley and Arthur Davidson, in Wisconsin. With the goal of bringing motorized bicycles to market, their first production motorcycle was a was a single-cylinder engine with 7.07 cubic inches (116cc) of displacement, installed in a pedal-bicycle frame. Quickly experiencing growth, Harley-Davidson quickly gained popularity among the general public and started introducing larger engines with more advanced features to broaden its product line and better serve its customers. The company quickly gained traction in World War I where it began to produce motorcycles for the U.S. military, and continued to do so in World War II.

Today, with high-end motorcycles seen as a luxury, discretionary purchase, Harley-Davidson has had to reinvent itself to stay relevant. While the company is still very popular among racers and motor enthusiasts, the company has grown its international presence beyond the United States and has also begun to introduce electric vehicles onto the market and has started to appeal to a broader range of riders through new partnerships and marketing, something I view as key to its growth going forward.

In addition to selling motorcycles, Harley-Davidson also sells parts and accessories. It also has a financial services segment which provides customers with financing to both individuals and dealerships. This segment makes up roughly 15% of total revenue. Of the remaining 85% which is motorcycles and related products, 77% comes from motorcycles, 16% comes from parts and accessories, 5% is apparel, and 2% is licensing and other.

Business Strategy

Harley-Davidson laid out their five year plan in 2021, The Hardwire, and it focused heavily on the company strengthening its leading position of being the most profitable and desirable motorcycle brand worldwide. Desirability is a key point here, and it’s one Harley-Davidson has emphasized numerous times on its analyst calls and investor presentations. Desirability remains at the forefront of their mission as the company believes that its product innovation, design enhancements, marketing and branding efforts, and customer engagement initiatives will be key to this mission as it expands into new markets and demographics.

According to IBIS World, the majority of purchases in the motorcycle industry are carried out by Gen X (those over the age of 45). Motorcycles are somewhat a relic of the past, with the 1960s and 1970s synonymous with motorcycles in many parts of the world. When I think of motorcycles, I can’t help but be reminded of great American films like “Easy Rider” and all of the motorcycle clubs, rallies, and events that were so synonymous with this time period. These decades saw huge cultural shifts, with motorcycles being a symbol of rebellion and freedom. Hence, it’s no wonder the market is heavily dominated by an older generation.

Over the next five years, demand from this aging population is expected to slow down with older generations much less likely do purchase motorcycles due to perceived risks of accidents as they get older. With lifestyle changes as baby-boomers look towards retirement, demand from younger generations will be key in order to retain a customer base and stay in business. As such, it will be important to have strong brand identity and find ways to market and cater to younger generations, who’s lifestyle, price sensitivity, and values tend to be different from that of older generations. One important note is that more customers are actually entering rather than leaving the sport, so the customer base still has potential to not only survive but also grow in the years ahead.

Another key part of Harley-Davidson’s business strategy I feel is noteworthy is its profitability. By focusing and investing into its most profitable motorcycle product segments like Grand American Touring, the large Cruiser and Trike, the company aims to get back to 15% operating margins (from 9% in 2021) by increasing unit profitability which will require a combination of increased pricing and cost-cutting.

Financials

When looking at Harley-Davidson’s financials, revenue growth looks lumpy and flat over the last five and ten years. Under the new CEO, Harley-Davidson is targeting 5-7-% growth per annum until 2025 and a 15% operating margin.

So far, I believe the company’s strategy is working well, as the company reported a 12.9% operating margin for the 2022 year, illustrating that its five-year plan is proving itself out in its financial performance. With investments in automation, enhanced inventory visibility, and supply chain and material optimizations, the company is targeting $400 million of cost productivity by 2025.

This is an ambitious target in my view, but I believe Harley-Davidson will be successful, particularly under the new CEO, as they’ve already delivered with $135 million of cost savings and $92 million retuned to shareholders since the five year plan started. To me, this demonstrates Harley-Davidson’s commitment to returning cash to shareholders and unlocking shareholder value by creating a more profitable business.

When looking at the company’s balance sheet, Harley-Davidson has $1.1 billion of cash and $765.8 million of long-term debt. While the company does have $6.3 billion of debt ($1.3 billion current) through its finance division, this is offset by $7.5 billion of finance division loans and leases owed to the company. With a Debt/Equity ratio of 14% and an ROE of 21%, I believe Harley-Davidson has ample room to grow its business without the need of outside financing and can do so through its cash generative business. Moreover, should Harley-Davidson want to continue to expand its business through M&A or other strategic initiatives, the company is in a strong financial position to take on additional debt or equity financing if necessary, as its current financial stability and profitability suggest that it can manage such expansion while maintaining a healthy financial position.

Valuation

Based on the six equity research analysts with one-year target prices on Harley-Davidson, the average price target is $39.50, with a high estimate of $45.00 and a low estimate of $33.00. From the average price target, this implies about 29.5% upside from the current price, suggests that analysts too feel Harley-Davidson is undervalued.

When looking at the valuation of Harley Davidson, the company trades at forward multiple of 9.9x EV/EBITDA and 6.6x P/E which are ~2-turns lower than their historical average five-year forward multiples. Notwithstanding interest rates, with a more profitable business ripe for renewed growth (in both revenue and profitability), I believe Harley-Davidson deserves a premium to its historical multiple, which priced the company for flat growth.

When looking at comparable companies in the motorcycle industry, the average forward EV/EBITDA multiple is 7.2x and average forward P/E is 12.8x. Given that much of the total debt in Harley Davidson’s cap table is part of its finance division and is more than offset by loans to customers (much like a bank), EV/EBITDA doesn’t seem like an appropriate valuation methodology unless we remove finance division debt and keep only long-term debt of the company. Another argument for removing the finance division debt is that it’s not operational debt used to finance operations of the business. Using the P/E ratio of 7.5x compared to peers at 12.8x, I believe Harley-Davidson is significantly undervalued. If the company were to trade in line with its peer group this would suggest at least 70% upside.

Catalysts

Harley-Davidson has successfully raised the prices of its motorcycles without experiencing a decline in sales over the last few years. With the increased pricing, this suggests that the company’s superior brand position has increased its products’ perceived value. In my view, this suggests that the willingness of consumers to pay for motorcycles is growing.

Another key catalyst is electric motorcycles through LiveWire, Harley-Davidson’s electric motorcycle division spin off. This is significant given that LiveWire is one of the first companies to transition to electric powered motorcycles and has a backing from one of the largest names in motorcycles. With the launch of the S2 Del Mar earlier this year, Harley-Davidson is creating riding for urban living through a low-cost, low-range electric vehicle motorcycle. With annual revenues of nearly $1 billion expected in the next two years, I believe this should act as a catalyst for topline growth going forward.

Under the leadership of CEO Jochen Zeitz, who is famous for his successful turnaround of Puma, I believe Harley-Davidson is being led by a qualified management team with a track record of success. In his previous role at Puma, he transformed the brand into a strong rival to footwear and apparel brands like NIKE (NKE) and adidas (OTCQX:ADDYY). While new product lines were certainly an ingredient in his strategy to turnaround Puma, it was his marketing of the company as a lifestyle brand that stood for individuality and self-expression that made it an attractive and desirable brand in the industry.

To me, I believe Harley-Davidson is in a similar position as Puma once was many decades ago. If history is any indication, CEO Jochen Zeitz is in a good place to lead a successful turnaround at Harley-Davidson and transform it into a modern and desirable brand for younger consumers, while honoring and preserving the company’s heritage and legacy.

Risks

The biggest risk to my investment thesis is that Harley-Davidson is unsuccessful in transitioning from its aging population customer base towards appealing to younger demographics. Should the company fail to garner attention and appeal from younger generations, the company could suffer longer term.

With significant capex invested in its LiveWire venture, the importance of being a market leader in the EV motorcycle market could not be more important. If LiveWire fails to produce the $1 billion of annual revenue over the next few years, this could hurt earnings for Harley-Davidson. There’s also a risk that LiveWire cannibalizes revenues from existing Harley-Davidson motorcycles.

Finally, as SA contributor Seeking Profits points out, with a higher interest rate environment and a weaker consumer, this may prompt credit and loan losses in the company’s financing division which could have an impact on earnings going forward. With a weak consumer, sales of luxury motorcycles could suffer. When looking back to the financial crisis, revenue did fall 17% that year, but this resulted in pent up demand in the following years so this risk is somewhat mitigated past on past performance.

Conclusion

In summary, Harley-Davidson is a well-known motorcycle brand with a strong legacy and heritage. Now led by an experienced CEO with the track record of successful business turnarounds, I believe Harley-Davidson will meet its 2025 targets and in the process, should create significant value for shareholders. With early signs of success showing with improvements last year, I believe the company will be successful in its pursuit to become one of the industry’s most desirable brands. With higher margins in the 15% range and identified growth opportunities ahead, I’m optimistic that the company should be able to generate significant cost savings and fund growth opportunities in the EV space or pursue potential M&A options or strategic opportunities. With a renewed sense of focus onto a younger customer base, Harley-Davidson is taking steps in the right direction. At a bargain-basement valuation compared to its historical average multiple as well as its peers, I believe Harley-Davidson’s strong fundamentals, growth opportunities, and higher profitability going forward should generate significant returns for shareholders.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Harley-Davidson: Revving Up For Profitability On The Road Ahead appeared first on Up2info.com.

• Harley-Davidson shares have been underperforming, losing 16% of their value in the past year and over half of their value in the past decade.
• The company’s revenue has fallen by about 2% and operating income is 18% lower than a decade ago, with declining volumes and squeezed margins.
• The company’s financing unit is also declining, with credit losses doubling and operating income expected to decline by 25% from last year.
• While shares look cheap, given limited potential for long-term free cash flow growth, this appears to be a value trap.

Shares of Harley-Davidson (NYSE:HOG) have been a poor performer over the past year, losing 16% of their value, continuing what has been a long period of poor performance. Shares have lost over half of their value in the past decade as the company tries to stay relevant to a new generation of consumers. With just a 6.5x forward multiple on consensus earnings and a recent increase in its share repurchase authorization, it is worth asking whether enough of the bad news is priced in and now it is time to buy HOG. I do not think it is.

Over the past ten years, Harley’s revenue has fallen by about 2% while operating income is about 18% lower than a decade ago. As prices have risen over the past decade, volumes have been steadily declining, and given rising wages and other input costs, this has squeezed margins. As HOG has struggled to connect to younger consumers and maintain brand relevance, shares have pushed lower, compressing down its valuation to today’s single-digit multiple. Ultimately, I am still struggling to see signs the company is set to embark on a growth journey. That said, some aspects do point to potential stabilization, but I still feel on balance shares are likely a value trap.

If we begin by looking at the company’s second-quarter results, it earned $1.22, down 16% from last year as total revenue fell by 2% to $1.45 billion. Motorcycle revenue fell by 4%, partially offset by a rise in financing revenue. Motorcycle operating income fell by 8% to $194 million as margins contracted 60bp to 16.2%.

In Q2, volumes were down 10% and prices up 4%, which was not enough to offset rising labor costs. Notably, gross margins for bikes rose by 390bp to 34.8% as commodity input cost pressures have abated, but this was offset by higher operating expenses.

It is important to note that HOG generates revenue by making and selling motorcycles to sell to its dealers. When the dealer buys the product, HOG books the revenue, not when the dealer goes on to sell it to a customer. During the quarter, Harley had unplanned production outages, which is a major reason its volumes declined – this is the second year in a row the company faced production issues, which does open questions about quality control of its operations.

While this outage led to the drop in deliveries to dealer blamed for the revenue decline, I am not certain HOG really under-delivered relative to end customer demand. Now, retail sales were up 3% in Q2 – seven percentage points better than Harley’s revenue. This sales growth and retail outperformance is a good thing to see, unquestionably. That said, inventories at Harley’s dealers have been rising and are probably now at an appropriate level, even after this retail sales outperformance. Harley dealers are currently carrying 52,000 units.

This is up dramatically from 2022 inventory of 27,000. Now like automobiles, motorcycle supply chains were significantly stressed during COVID, leading to production problems and product shortages. That 27k level was too low. I am not certain 52k is though. Admittedly, dealers were carrying 73,000 units in 2019. Looking at that metric, Harley could further increase deliveries to dealers, providing further revenue opportunities.

However, when there is too much inventory for demand, pricing concessions can become necessary in order to move products to create space for newer models. This was a challenge HOG faced during the 2010s as sales were falling. Pricing is the best way to measure inventory levels relative to demand; if prices are rising substantially, inventories are likely too low. Well, prices rose just 4% over the past year, broadly in line with consumer inflation. That does not appear to point to a lack of inventory.

Management aims for its bikes to sell within 2% of MSRP (manufacturer’s suggested retail price), when dealers are selling above MSRP, that points to them holding too little inventory, but when prices fall below MSRP, that can cheapen the brand, make customers trained to wait for promotions, and points to too much inventory. Last quarter, HOG was seeing transactions occurring in this 2% band. This makes me skeptical that HOG will be able to meaningfully “catch up” on revenue and volumes lost during its shortage because its dealers appear not to really need that much more inventory than they currently carry. Higher rates and inflation have also caused affordability and demand challenges, according to management, so this is unlikely to change in coming quarters. This means deliveries should largely be consistent with consumer demand trends.

Post COVID, Harley has been able to regain some margin by reversing its history of overstocking dealers with inventory. It will be important for them to retain their discipline. Particularly as the company has struggled to grow beyond its existing customer base which limits potential volume growth, maximizing profit per bike sold is critical to generating as much value as possible for shareholders. When we get Q3 earnings later this month, I will be closely watching dealer inventory levels, as I will be concerned if we see them marching much higher than the current 52k level as a sign that HOG is over-producing relative to end consumer demand.

This is particularly important because HOG’s secondary source of profitability is now declining: its financing unit. Harley-Davidson has a captive finance arm, which provides loans to buyers of its motorcycles. During the second quarter, its financing segment saw revenue rise by $38 million as it has been able to pass on higher interest rates to customers. Receivables also rose by 6% to $7 billion as stretched affordability has led more buyers to take on loans when making a purchase. However, this was offset by a $38 million increase in interest expense.

HOG borrows in the capital markets, via an asset-backed lending facility and through the issuance of medium-term notes to finance its bike loans. With this 1:1 interest expense to revenue increase, HOG has essentially been interest rate neutral.

That said, its credit loss provisions nearly doubled to $57 million. Currently, Harley’s Financial Services has set aside $352 million for credit losses. Just as we have seen from banks and credit card issuers, Harley has seen a rise in delinquencies and credit losses from 2021-2022. Much of this increase was to be expected as the benefits of government stimulus wore off and consumers spent down their excess savings. While I am comfortable with some decrease in credit quality, I am a bit concerned to see credit losses now running substantially higher than 2019 levels.

Now, HOG is also reserving more than it did in 2019 in response to this, so these higher losses may already be accounted for, but I will want to see signs of credit losses stabilizing this quarter and beyond to feel comfortable that credit losses will not continue to rise. As it is, management expects operating income from financial services to decline 25% from last year.

I also think it is important to recognize captive finance units are not always run to maximize their own profitability; instead, they are sometimes used to help support the underlying manufacturing business’ profits. In other words, in the face of weaker demand, rather than cut prices, HOG may offer lower interest rates to effectively reduce the cost of a bike. Similarly, it may loosen credit standards somewhat to move sales, at the risk of having larger credit losses down the road, as we are seeing now.

Now, this is not necessarily a bad thing, by using the financing arm to smooth through fluctuations in demand, volumes can be steadier, the brand damage of excess promotion can be avoided, and production levels can be maintained at more cost-efficient levels. Given management has spoken about affordability challenges and we are already seeing delinquencies rise, some of this may be occurring. As such, I see risks skewed to interest revenue rising more slowly than interest expense in coming quarters and that losses persist at somewhat higher levels. These are metrics investors should continue to monitor.

Finally, HOG is trying to grow into electric motorcycles, an effort that has not been particularly successful yet. Its “Livewire” electric motorcycle unit is progressing slowly with revenue of just $7 million and a $32 million operating loss. It aims to deliver 600-1,000 units this year and lose $115-125 million, though production challenges have pushed out product launches. Its new Del Mar has a price point of just above $15k as Harley tries to reach a broader swathe of consumers.

As with legacy automakers, the question is whether Harley will be able to recoup its investment in electrification, though given regulatory efforts to move away from fossil fuels, some of this investment may be necessary, even if it does not generate a particularly high ROI. While there is no data one way or the other, I struggle to believe there are large numbers of consumers who would be buying Harleys except for the fact they use gasoline. As such, I tend to think eventually EV sales will be more likely to cannibalize traditional sales rather than meaningfully grow HOG’s addressable market.

Looking at the balance sheet, it appears HOG carries $1.5 billion in cash and $5.8 billion in debt, but it is important to exclude its financing arm when looking at these figures as that debt is offset by loan receivables. Its motorcycle arm has $1.06 billion of cash against $750 million in debt. Now, about $250 million of its cash is supporting its cash-burning Livewire business, providing about a two-to-three-year runway to get to breakeven.

Accordingly, its legacy business has essentially a $0 net debt position, which is appropriate given the cyclicality and capital intensity of the business and is consistent with how automakers like General Motors (GM) and Ford (F) have run their business. HOG has a healthy balance sheet, which enables it to return free cash flow to shareholders, though I would not support debt-financed returns given the cyclical cash flows and uncertain path for revenue growth.

Recently, management added 10 million shares to its repurchase authorization (about 7% of the company), a sign of confidence in ongoing free cash flow. Still, I must note that the share count is down by about one-third over the past decade, and that has done little to support the share price. Indeed with most of these purchases coming at higher levels, the efficacy of this capital return is questionable.

Last quarter, management guided to full year motorcycle revenue flat to up 3% with about a 14.1% operating margin while financial services would see operating income down about 25%. I see downside risks relative to this guidance, and I believe investors should be paying close attention to the interplay between sales and margins/financing income. To what extent is management trying to keep volumes up, even at the risk of eroding per unit profits is a key question.

HOG has been for a prolonged period a “melting ice cube” business, one that generates cash, which it can return to investors, while seeing a gradual decline. Below, I provide three valuation scenarios: where free cash flow falls at 5% year as volumes continue to struggle, weighing on margins as seen last decade, one where free cash flow is flat, and one where free cash flow rise 2% year, discounted back to the present at 10%. I then have a terminal valuation of 15% free cash flow given the high cyclicality in the business and long-term growth questions, though markets may have a more discounted valuation in the first scenario and a more premium valuation in the third scenario.

At $30, shares are essentially pricing in a very small, persistent free cash flow decline. In the long term, I struggle to see this business generating more than 2% growth. Per the Fed, long-term nominal GDP growth is about 3.8%. Given its difficulty winning over younger customers, it is hard to see this business growing as quickly as the overall economy. One also has to question is Harley should be willing to lose $100 million/yr on its electrification efforts, which are generating minimal revenue, when that extra free cash flow may be better returned to shareholders to provide more value as the business declines.

While its 6.5x multiple looks cheap, HOG appears to be more of a value trap than value opportunity. I am not seeing signs that HOG has the demand to grow output and sustain margins while there is a risk financing profitability falls to support manufacturing output. Particularly as I see risks, with higher rates and inflation squeezing affordability of management having to reduce guidance when it reports earnings, I would avoid shares. I expect them to remain stuck in the $26-$31 zone of the -5% growth and flat growth scenarios. Downside is likely limited to 10-13% from here, but I struggle to see upside catalysts and believe investors would be better off investing elsewhere as Harley’s long-term underperformance shows no signs of reversing.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Harley-Davidson Appears To Be A Value Trap appeared first on Up2info.com.

• Harley-Davidson is a forgotten brand-name investment idea for many, after years of going nowhere fast, riding around in circles.
• The company is quite inexpensive on a number of financial performance ratios, including attractive enterprise valuations.
• The earnings yield argument suggests owning Harley-Davidson shares at the current quote may produce outsized returns over the next 12-18 months.
• If a deep recession appears, even lower share pricing could open another stellar buy moment for long-term investors, like previous economic downturns.

Harley-Davidson (NYSE:HOG) has witnessed little business growth over the past decade. However, with interest rates rising, the company’s finance operations are better able to generate cash flow to cover substantially fixed debt interest expense (70% due in 2024 or after). In addition to this positive development, slightly improved demand and margins after the pandemic may encourage a whole new level of shareholder success from this iconic motorized (and now rechargeable electric battery) brand in America.

If you are searching for a company to own, U.S.-built and focused for sales, synonymous with the national flag, mom and apple pie, Harley’s value and growth proposition appears to be very underrated and unappreciated in August 2023. On top of the fundamental buy story, technical trading evidence is hinting at a possible turnaround in the share quote. Let me explain the bullish thesis, focused on a mean reversion for trading in the direction of HOG’s typical long-term valuation.

Undervaluation Logic

The first point I would like to make is profit margins on sales have been quite steady since the company went public in the late 1980s, and are now the highest since 2017. Below is a graph of gross, operating, and final net profit margins. Differences in valuation can occur based on falling or rising business margins. For some of the long-term charts I will present, understanding that margins have remained relatively consistent over decades (outside of recession swings) is important to compare financial ratio apples to apples.

On basic fundamental ratios of price to trailing earnings, sales, cash flow, and book value, Harley is trading near a decade-low valuation (taking the stats in combination). Only the 2020 pandemic panic bottom was even cheaper than today. I particularly like the low P/E ratio of 6.4x vs. an equivalent S&P 500 number in the 20x area. (I will discuss the bullish earnings yield setup later in the article.)

When we include debt and cash totals held on the balance sheet, enterprise valuations may be even less expensive, in a relative sense, to HOG’s trading history. The current EV to stripped-down cash EBITDA multiple of 9x over the summer months is 35% below its 10-year average, while EV to revenue under 2x is a 30% discount.

Earnings Yield Buy Argument

Yet, the smartest pull for my money and research is the earnings yield argument. Assuming earnings are flat to higher over the next several years (which is today’s Wall Street forecast), the 15% earnings yield presently is quite attractive, to say the least.

If you owned the whole business for yourself at the present share price, you could “pocket” 15% annually right now (after taxes mind you), without affecting future growth or operating results. This is a nicely advantageous investment return compared to “risk-free” Treasury rates around 5% available as an alternative for your capital.

Below is a 10-year graph of the idea, with the positive spread vs. 1-year Treasury yields on the bottom. Over the summer, HOG has been priced beyond a rare and hard to believe +10% relative earnings yield level.

Over the last decade, only the March-April 2020 pandemic dump provided a better entry point on trailing earnings, and it lasted for weeks. If you blinked, you may have missed the opportunity. In fact, spreads of greater than +10% have occurred just three other times since 1990 (1990, 2008-09 and 2020). Each happened around a recession in GDP. I have drawn this idea below on a 33-year graph, with similar buy opportunities circled in red.

How did the previous three instances work out a year later? Let’s take a look. Each situation turned out to be a terrific point in time to purchase HOG shares. I have graphed each of the high earnings yield buys below.

Late 1990 Buy

Late 2008 to Early 2009 Buy

March-April 2020 Buy

All three instances of HOG’s relative spread of earnings yield to Treasury rates beyond +10% proved an excellent time to buy. And, as price continued lower into recession, even better buy entries appeared. Measured from the share price bottoms for each period, 1990-91 experienced a 12-month price gain of +300% thereafter, 2009-10 another jump of roughly +300%, and 2020 an advance of +250%. My conclusion is acquiring a starter stake now, with plans to buy additional shares on any weakness into the autumn, could be a productive strategy for long-term investors.

Technical Trading Pattern

I did make a successful long trade between $34 and $38 in the June-July span. I am now working on reentering a position. Technical reasons to buy are now appearing, although at a slower pace than I would like.

Drawn below, the Accumulation/Distribution Line has been quite strong, despite a flat price over the latest 18 months of trading. The 28-day Average Directional Line has declined under 15, a score that usually means a basing pattern with lower volatility has been the recent pattern.

The 10-day Rate of Change signals the selloff from $40 to $34 over two weeks may be overdone. If a bounce back above the 50-day moving average around $35.50 happens this week, it may signal a rising price trend has resumed off the May low price of $30.85. If not, a retest of the $30 to $32 area could be next (the lows of 2022 and 2023).

Final Thoughts

A rebirth of investor interest could easily push Harley back to February’s high of $50 (+45% for new investors) or even $60 (+75%) a share in 12 months without any material change in operations, especially if the overall economy is not hit by a serious recession. Despite a rebound in many cyclical industrials this year, Harley has been unfairly left behind. This disconnect in performance could be opening a terrific buy opportunity, as a simple reversion-to-the-mean valuation move may be in the offing. Using 10-year average multiples of price to earnings, sales, and book value, Harley-Davidson is worth at least $70 today, all other variables remaining the same.

An investment in HOG may depend on your outlook for the economy. If you are concerned a recession is inevitable, from inverted Treasury yield curve spreads and elevated to rising interest rates, I completely understand you may decide to skip this choice in your portfolio. Keeping HOG on your watch list for lower prices may be the short-term way to go, given a recession.

Of course, if a material contraction in U.S. GDP is reality over the next 6–12 months, Harley-Davidson may only be able to tread water for price (as a worst-case scenario). Higher default rates on its existing 2-wheel and 3-wheel vehicle loans, combined with slower than expected new sales, would definitely eat into profits. The question is – how much lower can the valuation go, assuming some sort of operating profit can be achieved in 2024?

However, if we experience a soft landing, where slow GDP growth remains over the next 12 months, Harley’s results may be able to beat current Wall Street expectations. So, a little increase in investor optimism from a low-base valuation could support a nice upturn in the share quote.

Harley retains a bullish valuation on earnings yield calculations, despite a timid growth outlook (at least according to Wall Street estimates today). It is sitting in the exact opposite valuation position of NVIDIA (NVDA), a sell suggestion I made last week here. NVIDIA has a miniscule trailing earnings yield of 0.5% vs. 1-year Treasuries at 5.5%. Plus, NVIDIA is priced at a 2% forecast on the profit-yield on your investment price for 2024-25 (even after assuming amazing AI-chip demand), still a wild miss vs. risk-free cash alternatives. In my experience, owning the forgotten blue-chip with lackluster growth has routinely beaten the performance of super-popular yet expensive names, after a rebalance of risk/reward inevitably takes place in the future.

Historically, a HOG earnings yield above 15% has proven a great time to acquire shares since the company went public. For those paying attention, the timing window to buy shares under this condition has usually only lasted for months, limited to three other instances over the past 33 years!

I rate HOG a Buy under $40. Unless we enter a deep and prolonged recession, I expect shares to hold the $29.50 to $30.00 price zone. Traders could entertain using a stop-sell order at a trigger price under $29.50, to keep potential losses limited to -10% to -15%. Then reevaluate the investment setup at that point. However, a larger break below $30 with the advent of a recession could open a truly excellent opportunity to buy Harley-Davidson on the cheap, if history repeats.

Assuming price falls all the way to $25 on the advent of a serious recession into the end of the year, a recovery back to 10-year normalized enterprise valuations on EBITDA and sales, roughly equal to decade average readings of 15x EPS, 1.5x sales and 3x book value could support $70 or $80 in price by the end of 2024. Such would be good for another +200% historical advance for astute investors with impeccable timing. Nevertheless, I doubt a drop under $30 will take place without a recession. So, opening a small position today makes complete sense, mindful of shorter-term risks.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in HOG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for educational and informational purposes only. All opinions expressed herein are not investment recommendations and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. Any projections, market outlooks, or estimates herein are forward-looking statements based upon certain assumptions that should not be construed as indicative of actual events that will occur. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. The author expressly disclaims all liability for errors and omissions in the service and for the use or interpretation by others of information contained herein. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication and are subject to change without notice. The author undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional materials. Past performance is no guarantee of future returns.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Buy Harley If You Want To Ride With The Big Boys appeared first on Up2info.com.

• Harley-Davidson’s financial performance over the past decade has been lackluster, with revenues remaining stagnant and the company struggling to attract a younger, more environmentally conscious customer base.
• Despite high expectations for its LiveWire brand, the company’s electric bikes are not selling well, and the main segment that manufactures standard Harleys lacks a catalyst for significant revenue growth.
• Harley-Davidson’s financials show a healthy interest coverage ratio and decent returns on assets and equity, but the company’s leverage and lack of a competitive edge may deter investors.

Investment Thesis

I wanted to take a look at Harley-Davidson’s (NYSE:HOG) financial performance in the past and see what kind of prospects it may have in terms of revenue growth for the next decade because just by quickly looking at the company’s PE ratio, it seems to be cheap but is there a reason it is cheap? In my opinion, the growth prospects are not great and so I think that the PE ratio is about right where it should be, and I think that HOG is a value trap and there might be better companies to invest in for the long-term.

Outlook

I believe that investors are not pricing the company higher because, in the last decade, performance revenue went nowhere. In FY13 the company reported $5.9B in revenues, fast forward to FY22 and revenues stood at $5.75B, so in the last 10 years the company did not perform well at all. Is there enough reason to believe that this will change going forward? I was disappointed with how badly the electric bikes are performing overall, and they look nice. It seemed like the company is trying to branch out and adapt to consumers, however, it seems like the company is not able to capture any meaningful younger customer base that is more environmentally conscious. It seems like right now that the segment of bikes is still very small and is not experiencing the explosion in sales that the company expected.

Nevertheless, the company has some lofty expectations for the LiveWire brand, going as far as saying they will be able to sell over 100k units by 2026. That does sound very good in theory; however, I don’t see this happening. For starters, the bikes are not very cheap, and the company expects that the new S2 Del Mar will be the savior because it’ll be about $5,000 cheaper than the LiveWire One. The company also said they expected to sell 7,000 units of the new bike, however, in the most recent earnings call, the company said they expect to sell 750-2000 units, which is a lot less and a very wide range.

In terms of the main segment that manufactures the standard Harleys, I don’t think there is much of a catalyst that will propel revenues to new highs in the next decade. The Hardwire strategic plan sounds good in theory, however, in practice, it may be hard to achieve this. We can see that the company is not a growth company and such low revenue growth makes it very unattractive for ordinary investors who are looking for excitement.

Financials

As of Q1 ’23, the company had $1.56B in cash against $5.2B in long-term debt. The market cap of HOG is around $5B. I would think a lot of investors are not happy with the amount of leverage the company has and are staying away from it, which contributes to the stock price going nowhere. I don’t think that should be a problem when considering where to park your money. Debt is another tool that a company can use to grow, and if it can manage the annual interest expense, then there is no problem in using debt. HOG’s interest coverage ratio is very healthy, standing at around 29x, meaning that operating income or EBIT can cover annual interest expense 29 times over. Debt is not an issue in my opinion.

The working capital ratio or the current ratio has been decent over the last half a decade at least, standing at around 1.34 and keeping steady at this level. This means that the company can pay off its short-term obligations without an issue and still has liquidity left over. On the liquidity side, I see no issues with the company at all.

In terms of efficiency and profitability, I am also satisfied with returns on assets and equity. These numbers are above my minimum of 5% for ROA and 10% for ROE. This tells me that the management is doing a decent job of utilizing the company’s assets and shareholder capital, which should create value.

I am not, however, excited about the company’s moat and competitive advantage. The company’s return on invested capital is not very impressive in my opinion, suggesting it has pretty much no competitive edge and no moat. I’d like to see at least 10% here.

In terms of margins, the company has improved these from the previous year and are quite decent in my opinion. The Hardwire strategy plan aims to improve these further, but only time will tell if the plan works out.

It looks like the company has been operating with these sorts of metrics for quite some time now and it is hard to get excited about them. I would like to see an uptrend in the above metrics continue and reach new highs. Right now, I have a feeling that the same numbers will continue going forward and that is just not exciting.

Valuation

It’s hard to assume higher revenue growth than the company had previously achieved. Sure, I can see that the company might reach the 4%-7% revenue growth in ’23, I’m just not sure if it can sustain it, given that in the last decade, the company lost revenue.

For the base case revenue assumptions, I went with a 2% CAGR for the next decade, which will bring revenues to $7B by ’32 from $5.7B in FY22. This is still a better performance than the company’s last decade.

For the optimistic case, I went with about 6% CAGR, while for the conservative case, I went with 0% growth over the next decade, which is very possible too.

In terms of margins, I assume that the company will manage to improve margins very slightly over the next 10 years and net margins will improve from around 13% in FY22 to 14%. I need to see more quarters of margin improvements to assume better efficiency and profitability going forward, so I’ll stick to this conservative estimate.

To give myself some room for error, I will add a 25% margin of safety to the intrinsic value calculation. It seems like the company is valued fairly right now because the intrinsic value calculation gives me an implied share price of around $36.91.

Closing Comments

It is hard to recommend investing in the company right now, especially since the LiveWire electric bikes are not selling very well. With the revenue growth that I assumed above, the company is worth what it trades at today, and it may stay at these levels longer if its initiatives fall flat. Over the last decade, revenues went nowhere while the share price is down 36%. I am rooting for this old-timer company to succeed, and I am glad the guys are innovating still, however, if the company cannot achieve better results in the future, there are many better companies out there that will reward its shareholders handsomely.

I will sit on the sidelines and will wait for the upcoming earnings call to see how well the electric bikes are performing. My guess is not well. The company may look cheap, but it can be a value trap in the long run in my opinion.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Harley-Davidson: Seems Like A Value Trap appeared first on Up2info.com.