Harley-Davidson: Ready To Rumble, Electrically – Seeking Alpha

Investment Thesis

Harley-Davidson ( NYSE: HOG ) is currently engaged in a brand new corporate strategy aimed at streamlining operations while simultaneously reinvigorating their brand identity through a new lineup of motorbikes.

Solid profitability and a return to historic levels of unit-economics suggest the company is well on their way to achieving their own lofty goals.

However, the high price-tag currently pinned to their shares makes creating a position a difficult argument in order to make from a pure value perspective.

Company Background

Harley-Davidson is an American motorcycle manufacturer known primarily for their extensive range associated with motorbikes, biking accessories plus apparel. They are headquartered in Milwaukee, Wisconsin.

Harley has a good extensive history in the motorbike manufacturing industry having been founded in 1903 . For decades their particular core line-up of bikes has been focused in the style of motorbikes known as “choppers”. These are usually air-cooled cruiser bicycles with a displacement greater than 600cc.

These bikes are big, smooth and popular among bike enthusiasts having become some of the most identifiable and popular bikes in the world. The company has garnered a brand culture which reflects this macho, bad-boy attitude their bikes command.

Furthermore, the following for the particular firm’s bikes has become almost cult-like with many Harley oriented bikers showing incredible loyalty towards the companies motorcycles.

This brand identity plus customer loyalty is currently being maintained through the HOG : Harley Owners Group. The very same acronym that gives rise to the ticker for their own stock.

Harley is current engaged in their particular ” Hardwire ” strategic plan aimed at enhancing their position as the market-leading motorcycle brand, along with a primary focus resting on the development of new bikes including a series of electric motorcycles marketed and sold under the ” LiveWire inch moniker.

Economic Moat – In Depth Analysis

Harley-Davidson exhibits one of the widest economic moats within the motorbike manufacturing business. Their considerable brand identification, customer loyalty combined with a newfound drive for innovation in the electrification of motorbikes provides significant footing with regard to the company to succeed moving into the particular future.

One of the key strategies in Harley’s Hardwire initiative to inches rewire ” the brand is centered around the customer experience for both motorcycle riders and non-riders. The objective regarding the firm is in order to drive brand desirability via emotional responses in consumers.

By further enhancing the particular ecosystem around their motorbikes through accessories, brand events and marketing campaigns, Harley should be able to tap into the less rational, desire-side of consumers mindsets.

This method of improving their already extensive brand name identity by means of emotional connections with customers has already been proven by researchers to be an incredibly powerful method of marketing.

This focus on more than just bicycles culminate in what Harley refers to as the inch Harley-Davidson Lifestyle “. The aim for the particular firm will be to concentrate on expanding into complementary businesses and engage in delivering consumers accessories, apparel and licensed products to become a global lifestyle brand.

Equally, Harley is usually committed towards building the most technologically advanced motorcycles available on the market. This focus currently materializes through the push in order to provide an extensive portfolio associated with electric motor bikes marketed and sold underneath the LiveWire brand name.

Harley established LiveWire as its own motorcycle brand within mid-2021 . This was accompanied by the first company-owned dealership which usually exclusively sells the brand new LiveWire brand of electric powered motorbikes. All other Harley dealerships are independently owned.

The LiveWire range of electric motorcycles are some associated with the first mass-produced e-bikes being offered on the market. Harley should continue to benefit for another couple years from essentially existing as the sole supplier of electric motorcycles to customers.

More importantly, Harley the majority of likely harbors a significant technological advantage compared to the competition thanks to their substantial R& D investment towards electrification of motorbikes. Due to the compact nature associated with a motorbikes frame, it is a particularly difficult style of vehicle to electrify successfully using current-day battery technologies.

This engineering advantage will no-doubt carry on to provide Harley with a sizeable benefit over the particular competition with regards in order to electric bikes, and should keep on to do so for at least the next five many years.

While the electric LiveWire brand is an undoubtable departure from the tried and tested +600cc bad-boy cruisers Harley is recognized for, this particular diversification is definitely another element of their Hardwire corporate technique.

The LiveWire branding is aimed particularly at expanding into a sportier market environment along with an unique and innovative offering. Harley hopes this will give them a tangible competitive advantage.

The company aims to harness new motorbike segments such as the adventure explorer segment which is currently dominated simply by BMWs GS lineup associated with bikes.

This expansion comes with the promise of rejuvenating Harley’s ageing consumer base with entirely new customers looking intended for a different riding experience.

Simultaneously, the company is simplifying their line-ups in the particular sports cruiser and touring market segments to reduce costs and eliminate underperforming models. This should allow the company to increase manufacturing volumes of their best performing models while reducing production complexity.

These technological advantages combined with a vibrant and strong brand identity allow Harley to control a premium price to get their motorbikes which can be good news pertaining to profit margins plus shareholders.

Unfortunately, Harley-Davidson does operate in the especially cyclical and highly competitive global motorbike manufacturing market. This means Harley is certainly subject to customers who have continuously changing tastes while concurrently battling the currently prevailing macroeconomic headwinds.

However , their own excellent creation of a Harley lifestyle offers created substantial social switching costs meant for consumers, with many having incorporated Harley-Davidson into their lives, thus making a switch to another brand name very unlikely.

Furthermore, their particular strong pricing power should allow the firm to perform reasonably well within an economic slowdown, because consumer ought to still be willing to pay for the “lifestyle product”.

Financial Situation

Harley-Davidson has had a highly profitable background, especially given the prevalent abundance associated with loss-making firms in the particular motorcycle sector. Nevertheless , the past five-years have seen a plateau forming in their revenues, along with a substantial decrease in unit-economic efficiency as well as total motorbike deliveries.

From an income statement perspective, the particular company had a robust gross profit inside FY21 of $1. 7B. This represented an boost of 65% compared to FY20, but an overall decrease of -16. 2% when considered against their 10Y average. Gross profits in FY22 are expected to surpass those of FY21 by close to 15%.

Already within the 1st three quarters of FY22, Harley offers achieved a net profit of $699M representing the net margin of 12. 8%, compared to a margin associated with 12% in the whole of FY21. Harley’s Motorcycle department sales income in Q3 FY22 also grew by 24% in comparison to Q3 FY21 largely due to the rise in price positioning abilities designed for the companies products.

Harley’s operating margins increased significantly inside FY22 Q3 compared to the same period last year. This 8. 4% improvement to a good operating perimeter of 17. 9% has been largely attributable to higher manufacturing leverage and lower tariffs.

While total working expenses were $20 million higher when compared with Q3 this past year, this was primarily due to the increased spending by the company on the LiveWire brand.

The particular increased revenue seen in the particular first nine-months of FY22 were largely thanks in order to the 19% increase within global wholesale motorcycle shipments and also an improvement in their global prices strength.

North America remains Harley’s largest marketplace by sales volume plus revenues accounting for 65% of total motorcycles marketed. However, the largest growing segment by far is the Asia Pacific market where FY22 Q3 product sales have improved 18% in comparison to the prior year.

While North American sales actually decreased 5% within the same period, this had been largely due to a lack of inventories in dealerships. This was primarily caused by the two-week shutdown associated with Harley’s production facilities earlier in May of 2022 causing the backlog in parts and motorcycle deliveries.

Total quantities have reduced 2% compared to FY21.

However, probably the most attractive factor for Harley is the particular significant overhaul management has managed to achieve in unit profitability. Since 2019, Harley is expecting to have increased device profitability down from about $1300/unit to over $3000/unit.

This 130% increase will allow Harley to further solidify their own profit-making abilities through continued investment into the LiveWire brand of bikes.

This particular huge enhance in unit-economics is largely due to significant model pruning of underperforming bikes (in sales terms) and through improving their particular cost-structure at the firm.

Considering revenues continued to increase even with a slowing within deliveries, the 2% decrease in product sales volumes does not constitute a factor that places the worth or future ability to generate shareholder returns into jeopardy.

Furthermore, the particular slowdown in deliveries is not distinctive to Harley-Davidson, and provides been experienced by almost all motorcycle manufacturers including BMW ( OTCPK: BMWYY ) and Harley’s historic rival, Indian Motorcycle.

Overall, Harley has shown healthy plus continued growth on the income statement which has resulted in their TTM ROIC growing to 7. 6% compared to only 6. 7% within 2021. Their five-year regular ROIC will be 4. 82, which highlights the magnitude of Harley’s return to operational effectiveness and profitability.

Harley has also been growing their operating margins post-pandemic through just 3. 45% in 2020 in order to a TTM of 16% in December, 2022. The forecast operating margin of 16% in FY22 even trumps Harley’s 12. 16% 5Y average.

Harley’s balance sheet looks to be in healthy shape much akin to their earnings statement. Their own total present assets for the TTM are usually $5. 01B while current liabilities only amount to $3. 7B. Harley offers a good quick ratio of 1. 04 present assets minus inventory divided by current liabilities). Their particular current ratio is even more attractive at 1 . 36 (current assets separated by present liabilities).

Harley exhibits healthy fiscal stability and is not presently struggling with any major liquidity risks.

With regards in order to the LiveWire brand, on September 26, 2022 the planned merger with AEA-Bridges Impact Corp. (ABIC) has been completed . ABIC is a special purpose acquisition organization.

The deal gave ABIC a 5. 7% stake in LiveWire and provided the brand with net proceeds associated with approximately $294 million. $180 million of that total sum includes investments into the particular brand made by ABIC.

This tactical merger enables LiveWire to become the first publicly traded EV motorcycle business. Furthermore, the proceeds need to help fund LiveWire’s proper plan to accelerate its go-to-market model, invest in new product development, and enhance global manufacturing & distribution capabilities.

LiveWire itself is now valued pro forma to have a good enterprise value approximately $1. 77B.

Seeking Alpha’s Quant assigns Harley with a success grade of B+ which I believe is usually representative associated with the cash flow and general value generation abilities of the firm. Cash circulation from procedures amounted in order to a TTM figure associated with $625M.

What is particularly noteworthy is the particular net income per employee figure of $124. 33K. This is outstanding and over 850% above the sector median. This highlights the efficiency plus restructuring efforts being undertaken at Harley as they seek to rid themselves of excess costs.

Similarly, their leveraged FCF margin is healthful at eight. 77%. This particular exceeds the particular sector median of 1. 27% handily and illustrates the return to earnings the company provides been trying to achieve post-pandemic.

The evidence of the Hardwire strategic plan beginning to bear its fruit its additional highlighted simply by their EBITDA margin for that TTM growing to 19. 5% in comparison to a historical 5Y typical of just 16%.

Whilst their return on complete assets and on total capital are the little lower than investors would like to see, this is largely attributable to their large spending on the LiveWire brand plus the associated R& D costs.

Harley is undoubtedly around the right tracks from a cashflow perspective which should begin in order to provide shareholders with real returns.

Valuation

Seeking Alpha’s quant system has assigned a D- valuation rating just for Harley, which usually I think might be a little harsh as it implies the stock is overvalued. Their FWD P/E GAAP of 9. 38 is definitely below the particular sector typical of 14. 06 and well below their 5Y average of 20. 10.

However , their own FWD EV/EBITDA of 11. 73 can be well over the field median associated with 8. 84. Equally, their particular EV/Sales FWD multiple is usually only 2 . 59. This is simply poor and suggests the company is valued well above their sales potential.

I believe these metrics illustrate that shares are currently trading approximately at their intrinsic marketplace value. As the underpinnings of Harley-Davidson are strong and the fruits of the Hardwire ideal plan are beginning to surface, the share prices are simply well over the deep-value levels we look for the purpose of here at The particular Value Corner.

In the short term (3-10 months) it is hard to say what the particular stock will do. I believe the stock price will certainly exhibit some bearish tendencies due to the challenging macroeconomic environment combined along with an connected sell-off after the recent rally Harley has observed.

However, the much-awaited Q4 and FY2022 reports could even bring a boost to the particular share price if results are since positive as we are expecting.

In the long-term (2-4 years) their own strong placement as the profitable motorcycle manufacturer mega- coupled with a new efficiency-focused operations model should permit Harley to continue generating meaningful shareholder worth.

Considering that share prices currently reflect the firm’s intrinsic value, the stock would have to drop closer to the $30 mark before an investment argument could become made from the deep value perspective.

Risks Facing Harley-Davidson

The primary risks facing Harley-Davidson arise through the highly cyclical industry in which it operates along with from their ageing consumer base. Careful consideration of worldwide economic factors is critical when investing in this kind of companies.

Harley’s sales plus historical discuss prices possess been closely tied in order to the prevailing macroeconomic conditions. The fear and very actual reality of the potential recession impacting markets in 2023 could hamper their Hardwire strategy plus limit spending on crucial R& D for your LiveWire bikes.

This potential economic slowdown could end up being further hampered by Harley’s ageing customer base with a majority of clients being in the particular over-35 demographic.

The risks related with a maturing consumer base is certainly the potential for a sales slowdown as more mature demographics tend to be more conservative along with spending. Furthermore, the risk of the brands identification becoming antiquated would threaten Harley’s entire strategy associated with ensuring the “lifestyle” around their bicycles.

If this lifestyle is to be associated with an older market, the brand name could begin losing interest in younger consumers mindsets, a situation which arguably has been the particular case for the past five yrs.

Harley of course aims to change this with their LiveWire brand and push for a lot more sporty, youthful motorbikes. Nevertheless, the success of this strategy within and of itself will be highly uncertain. Harley could fail in the execution of their electric motor bikes as well as within the subtle rebranding towards a younger era.

Furthermore, the organization could risk alienating current customers if they begin in order to neglect the rumbling cruisers the firm has built their particular image upon.

From a good ESG perspective, Harley just really faces one threat; quality control. The shutdown of the manufacturing facilities inside May associated with 2022 due to a “regulatory compliance matter relating to a third-party supplier’s component part”.

Clearly, this element issue must have been truly significant since it halted all deliveries, product sales and production for two entire weeks. Interestingly, the particular LiveWire bikes were not impacted by this particular part, suggesting it may have had something do along with Harley’s combustion engine technology.

Should Harley continue to face such substantial component quality issues, these people may begin to feel the very genuine fiscal consequences that follow. However, such a large-scale issue does seem to be an unique event and many likely should not replicate itself any time in the particular near future.

Summary

Harley-Davidson has had the rough couple of years leading-up to 2022. Nevertheless, solid business fundamentals, solid brand strength and a new focus on performance have allowed the business in order to grow sales revenues significantly while remaining profitable throughout.

Unfortunately, reveal prices are usually approximately fairly valued leaving potential worth investors with little to base a strong investment thesis on.

While The Value Part does not see Harley-Davidson as a good value opportunity at its current value, it may be interesting to re-evaluate the situation should stocks drop in order to a more budget-oriented price point.

If you are looking to immediately increase your portfolio exposure for the customer cyclical industry, it may be prudent to consider other alternatives such as Volkswagen ( OTCPK: VWAGY ) or actually BMW ( OTCPK: BMWYY ).