Harley-Davidson (HOG) is an all-American name, yet the company sells nearly half of its motorcycles outside of the United States. American riders simply no longer have the passion for hogs they had years ago. However, Harley-Davidson’s problems extend beyond the dwindling American market.
The company’s current board of directors has no experience in the motorcycle industry. Sales are down across the board. Though this might seem like quite the gloomy picture, plenty of investors insist Harley-Davidson is worthy of attention.
Can Harley-Davidson Bounce Back?
Harley-Davidson’s revenue has decreased for four consecutive years. The company’s revenue was down double-digit percentages across this past year. The silver lining is Harley-Davidson ended the year with nearly $3.4 billion of global revenue. Unfortunately, some Wall Street analysts are hung up on the company’s diminishing U.S. market, high raw material costs and quality problems.
Shares are down a total of 23 percent in the past three years. Though Harley-Davidson beat first quarter estimates by 13 cents per share, the company’s 80 cents per share is still rather paltry compared to the $1.03 earned per share last year. The reduction in earnings caused the likes of David Tamberrino from Goldman Sachs to downgrade Harley-Davidson shares from neutral. Tamberrino reduced the price target from $37 to $34. The stock is currently priced at $37.50.
The question is whether Harley-Davidson can sell more motorcycles to people across the world in an era in which sport utility vehicles are becoming the automobile of choice. Company executives are expanding the business to brand new markets, developing smaller bikes and even dabbling in electrification.
A Shift to Electric
Harley-Davidson recently acquired StaCyc, a company that makes electric scooters with two wheels marketed to kids. These models cost less than $700 at Harley-Davidson stores and specialty bicycle retailers.
The acquisition of StaCyc sent Harley-Davidson’s stock up more than 5 percent. The addition of StaCyc is intriguing as it comes on the heels of the company’s debut of its own electric bike known as LiveWire. The logic in adding StaCyc is electric scooters provide a means of connecting with the next generation of bike lovers. However, it might take upwards of two full decades for this investment to pay meaningful dividends.
What’s Next for Harley-Davidson?
Harley-Davidson might seem like a company stuck in the mud, void of momentum and struggling to evolve. Though the addition of StaCyc certainly set the company back financially, it could pay off in due time. The purchase of this electric bike maker is not that meaningful in the context of company finances when you consider Harley generated more than a billion dollars in free cash flow in 2018 alone. The company has a dividend yield in excess of 4 percent.
Despite all of this, investors have good reason to worry about Harley’s growth for the future. As noted above, motorcycles are slightly fading in popularity in the United States, yet gaining popularity in parts of the globe where the population is soaring. Those living in large cities are inclined to ride motorcycles, bikes and other diminutive vehicles to maneuver in and out of traffic with ease. Unfortunately, it will take some time for the population boom to force a society-wide transition from sport utility vehicles to motorcycles, mopeds and bicycles.
The sad truth is Harley executives do not have an ace up their sleeve to acquire more customers. Aside from the potential for electric bikes, no one seems exactly sure where Harley goes from here.
Buy, Sell or Hold?
Hold or sell. Harley’s sales in the United States are at an all-time low. The fact that the company’s international sales are on the decline adds salt to the wound.
It appears as though there is no optimism for a sales turnaround. Investors cannot bank on the company’s electric two-wheelers, regardless of how trendy they might become. The eventual transition to smaller vehicles including motorcycles certainly provides hope for Harley investors, yet the transition might take decades.
At this point, investors have no reason to scoop up shares of Harley-Davidson. Sit tight on the sidelines until some positive news comes out of the Harley-Davidson camp. Current shareholders should consider selling a portion of their stake when the appropriate opportunity arises. Steer clear of Harley-Davidson until it company leaders finally figure out the panacea for declining sales.
Regards,
Ethan Warrick
Editor
Wealth Authority
