EUR 850.00 For Business Accounts Only

Morningstar | HOG Updated Star Rating from 05 Mar 2019

With a long history of manufacturing experience, Harley-Davidson has brand strength and a dealer network that give the company a wide economic moat and dominant position in the U.S. motorcycle market. However, there are no switching costs to protect Harley's brand when consumers replace their bikes, and the premium price Harley commands relative to its peers has proved problematic during cyclical downturns and periods of competitive pricing. During these periods, lower peer pricing has dragged on Harley's retail sales and shipments. In 2015, foreign competitors used the exchange-rate differential as an opportunity to discount their bikes domestically, hurting Harley's market share--and this could happen again with higher foreign exchange volatility. Market share recovered 1 percentage point to 51% in 2016 but ceded gains in 2017 and 2018 (to just below 50%) as industry discounting remained pervasive and demand waned. It is imperative for Harley to produce high-quality, innovative products that cater to a wider audience; this is a focus of the recently launched More Roads strategy, which expands into electric, middleweight, and small-displacement products. This expansion requires funding, boosting operating and capital expenditures in the five year period between 2018-22 to a cumulative $500 million and $250 million, respectively. While the operating investments are likely to be offset by manufacturing optimization savings, higher incremental capital spending will pressure free cash flow growth in the near term.Furthermore, we expect rising spending on product development to maintain premium brand perception and boost product launches on the existing heavyweight side, driving faster product cycles. Overall, we don't see product investments improving margins until 2020, after Harley launches its new electric bike (2019) and brings its middleweight product (2020) to markets, leveraging costs on higher volume. Until then, adjusted motorcycle operating margins should remain depressed, remaining around 11% in 2019, with weak domestic demand continuing to pressure gross margins.