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Morningstar | Negative Demographics Underlies Fair Value Update for Harley as Domestic Market Continues to Shrink

We have lowered our fair value to $34 from $44 per share for wide-moat Harley-Davidson, after incorporating assumptions that include the firm’s entry into middleweight and small displacement bikes in 2020, which we expect to drag on profitability. The decline in our fair value stems from lower gross margin (more than $10) and average selling price declines ($3 impact), which are partially offset by volume increases that helped better lever selling, general and administrative expenses. Our forecast includes a legacy bike business that experiences low-single-digit shipment declines, offset by a high 20% average increase in new platform unit growth, and average selling prices that should contract 1% over the next decade, as small displacement and middleweight shipments rise to about 30% of the total in 2028, from 6% of shipments during 2020 in our forecast.

Further, after reassessing U.S. Census data, we expect demographics to remain a headwind for the domestic heavyweight business (nearly 60% of 2018 shipments), a key factor in our moat-trend change to negative from stable. The outlook for the size of the historic core Harley consumer (male, Caucasian, aged 35 and older) is unfavorable over the next 30-plus years. For reference, the total white population between 35-64 years of age is set to fall to 68.5 million in 2060 from 78.3 million in 2016 (a 13% decrease stemming from a nearly 10 million-person decline), whereas the entire African-American and Asian population between 35-64 years of age is projected to rise to 24.8 million in 2060 from 18.8 million in 2016 (a 32% increase driven by 6 million new people). And despite innovation that has catered to the traditional Harley core customer, Harley has failed to halt shipment declines as the traditional heavyweight market continues to shrink, With shipments decelerating, existing consumers could be falling out of the total addressable market faster than Harley can fill the gap with demand from new riders.