EUR 850.00 For Business Accounts Only

Morningstar | Shipment Slowdown Implies Harley Continues to Struggle to Attract New Customers Fast Enough

Although Harley has made inroads in outreach categories in recent years, we contend these steps have failed to stall declining demand from its core domestic demographic. Coincident with aging baby boomers falling out of the end user market for Harley, shipments have stalled, set to contract to an estimated 219,000 in 2019 from more than 270,000 in 2014. Furthermore, although touring represented around 45% of sales in 2018 (in line with 2014), motorcycle operating margins have contracted, declining to 11% from 18%, evidencing a shift to lower profits per bike. As a result of the ongoing demographic headwinds it has failed to mitigate, we now believe Harley's moat is eroding (with our adjusted ROICs declining to 21% by 2028 from an average of 30% the past five years.) However, we still see its wide moat intact, anchored in its brand intangible asset, which ensures Harley continues to resonate with consumers with stable pricing in legacy segments.

Going forward, we expect shipment declines will reverse thanks to Harley’s More Roads initiative, launched in mid-2018, bolstered by rising international shipments beginning in 2020. However, as it now opts to target the middleweight and small displacement markets, where successful incumbent players already reside, Harley is poised to capture share gains at lower profit margin levels than it has with its heavyweight models. We recently lowered our fair value estimate to $34 from $44 in response to the gross margin pressure we anticipate from product launches, leaving shares fairly valued. However, we'd expect confidence in Harley to wane more once profit details surrounding new bike launches are offered, which could send shares tumbling further. With crimped profitability already factored into our model, we'd be compelled to take a ride in shares after a 20% downdraft from current market prices. In the meantime, we think investors should take a ride with wide-moat Polaris, which trades at a 20% discount to our valuation.

For further details surrounding our long term-outlook for Harley-Davidson, please see our July 2019 report, “Efforts to Rev Demand at Harley-Davidson Likely to Slow Its Roll.”