Harley-Davidson: Too Many Risks For Comfort

Since 2014, Harley-Davidson (NYSE:HOG) has been struggling to boost sales amidst changing consumer preferences and augmenting foe from lower-priced, unfamiliar brands. Management’s bid to boost shareholder value by expanding within general markets has been equivalent by lagging sales, augmenting debt, low margins, and augmenting credit risk. we trust Harley-Davidson is a good brief claimant with a 12-month cost aim of $38.00.

Company Overview

Harley-Davidson, founded in 1903, is a motorcycle association that operates in dual opposite business segments. The Harley-Davidson Motorcycle Company (HDMC) overlooks a design, sales, and production operations of a company, and a Harley-Davidson Financial Services (HDFS) provides financing for both indiscriminate dealers and sell customers. According to IBISWorld, Harley-Davidson controls 49.3% of a motorcycle, bike, and tools production industry. As of Apr 10th, shares are trade during $42.38 with a P/E ratio (TTM) of 13.92.

Financial Performance

Harley-Davidson has been renouned among Caucasian masculine baby boomers aged 40 and older. One of a biggest hurdles for a association has been a aging baby boomers and their light change divided from motorcycle riding. Moreover, Harley-Davidson’s celebrated and shrill motorcycles have unsuccessful to benefit recognition with other demographics, including minorities, females, and a millennial generation. In sequence to boost income and seductiveness to a broader audience, Harley-Davidson has been expanding internationally and investing in a expansion of a initial electric motorcycle under a LiveWire Project.

So far, however, a certain impact of these initiatives has been doubtful. Compared to 2016, U.S. and general sell sales decreased by 8.5% and 3.9%, respectively, heading to an altogether diminution in sell sales by 6.7% in 2017. Furthermore, sum conveyance decreased by 7.9% and handling income of a HDMC shred (which accounts for about 90% of a company’s sum revenue) decreased by 20.4% during a same time period. Since 2014, Harley-Davidson has been struggling to grow income and boost a marketplace share; between 2014 and 2017, income and EBITDA decreased by 9% and 24%, respectively.

Source: StockCharts

International Sales

Despite a new unemployment in general sales, a biggest matter for a association still lies in a ability to successfully enhance into markets outward of a U.S. Between 2016 and 2017, Harley-Davidson combined 97 new general dealers, with additional skeleton to supplement a sum of 150 to 200 new dealers from 2016 by 2020. Although a augmenting bearing of Harley-Davidson from new dealers might lead to an boost in conveyance and top-line growth, new trends have shown that this has been an ineffectual strategy.

Harley-Davidson’s general dealers, that embody those in Latin America, Asia, Canada, and Europe/Middle East/Africa (EMEA), gifted a diminution in sell sales between 2016 and 2017. Harley-Davidson also faces problem in a subsequent few years from macroeconomic conditions. As a Federal Reserve Bank raises seductiveness rates, it will turn some-more costly for domestic consumers to steal money. Furthermore, banking headwinds from a strengthening dollar will negatively impact unfamiliar revenue.

International Manufacturing

Harley-Davidson competes with unfamiliar brands like Suzuki, Kawasaki, and BRP. These manufacturers take advantage of inexpensive labor that is accessible in building countries by opening adult new production plants there. However, Harley-Davidson has been wavering to rivet in these practices, especially due to a iconic, Made-in-America image. Although some of a internationally marketed motorcycles are done during comforts in Brazil, India, and adult until recently, Australia, Harley-Davidson motorcycles sole in a U.S. are done domestically. Without a ability to diminution production costs, a association has resorted to augmenting prices in sequence to obtain improved margins. Unless Harley-Davidson successfully addresses this emanate by expanding production operations into building countries, a association will continue experiencing dwindling margins.

Risk From Company-Dealer Relationship

Due to Harley-Davidson’s operation in dual opposite business segments, a association suffers substantial risk from intensity shortcomings of a dealers. Harley-Davidson not usually depends on a dealers for a sale of a motorcycles though it also depends on them to do it successfully and perform their debt obligations to Harley-Davidson Financial Services. The biggest risk lies in a North American market, that is a usually segment that receives financing from Harley-Davidson Financial Services. Although dealers outward of North America accept financing from third-party financial services companies, their inability to accommodate sales targets and perform a debt obligations can harm both bottom-line expansion and Harley-Davidson’s attribute with these companies.

Risk From Debt and Financing Segment

The credit peculiarity of Harley-Davidson has been dwindling given 2014. From 2014 until 2017, sum debt augmenting by 27%, while EBITDA decreased by 24%. Interest responsibility continues to boost as a association takes on some-more debt, heading to a reduce EBITDA to seductiveness responsibility ratio.

Source: Data from association 10-K

Furthermore, a sum volume of derelict accounts receivables has been usually augmenting for sell buyers, including those larger than 90 days past due. Accounts receivables that are derelict for 120 days or some-more are deliberate to be uncollectible and are charged off. Consequently, Harley-Davidson Motor Company’s revenues contingency be practiced to accurately comment for these delinquencies. Harley-Davidson Financial Services is also during risk given it uses motorcycles as collateral. Defaults can be unpropitious to a association for several reasons.

First, as Harley-Davidson repossesses some-more used motorcycles, a sum supply of used motorcycles in a marketplace increases and their prices go down. As a value of used motorcycles goes down, a value of a material also goes down, heading to an even larger credit detriment for a company. It’s also value observant that a introduction of models with new technologies leads to a diminution in direct and cost for both used motorcycles and prior-year new motorcycles. Increased default rates for accounts receivables from sell sales poses a probable maze for a company; nonetheless a introduction of new models might boost sales, it can also diminution a value of repossessed used motorcycles, heading to serve credit detriment for a company.

Total Past Due From Accounts Receivable

Source: Data from association 10-K

A/R Greater Than 90 Days Past Due

Source: Data from association 10-K

Closing Thoughts

Management gave a disastrous opinion for 2018, with reduce domestic sales and prosaic to reduce general sales. Total conveyance in a initial entertain of 2018 is approaching to be between 60,000 and 65,000, with an annual conveyance aim between 231,000 and 236,000. Harley-Davidson has been struggling for several years and this trend is expected to continue into a future. In sequence to successfully boost income and money flow, government contingency urge a collection rate of a accounts receivables, exercise a new devise to boost general sales, and renovate a company’s picture to aim a different set of consumers. Unless these changes are made, we design share prices to continue falling.

Disclosure: I/we have no positions in any bonds mentioned, and no skeleton to trigger any positions within a subsequent 72 hours.

I wrote this essay myself, and it expresses my possess opinions. we am not receiving remuneration for it (other than from Seeking Alpha). we have no business attribute with any association whose batch is mentioned in this article.

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