Zacks Equity Research
Harley-Davidson’s HOG shares have plunged 44% over the past year against the industry’s 17% rally. The company, which is a notable name in the motorcycle industry, has been witnessing earnings and sales decline. The firm’s U.S. sales declined for the fifth consecutive year in 2019.Aging customer base in the United States — which is Harley Davidson’s biggest market — and stiff competition from more affordable and lightweight bikes are weighing on the stock. Let’s delve deeper into the factors that have put Harley-Davidson in a bad shape.
Harley-Davidson in Doldrums
With the lack of youth appeal and a fewer people riding motorcycles, sales of Harley Davidson’s motorbikes are on the decline, especially in domestic markets. As new riders are not replacing an aging generation as millennials don’t value the motorcycle status symbol, the firm is having a tough time attracting buyers. With millennial consumers preferring convenient modes of transportation and ridesharing services, they are of the opinion that owning a motorcycle might simply not be an attractive option. Hence, as the company’s core customer base ages and industry demographics shift, the resulting decline in the U.S. market seems to be the most pressing issue for Harley-Davidson.
Rising costs due to tariffs on steel and aluminum, along with tariffs levied on bikes sold in international markets are likely to dent profit margins of Harley-Davidson. Even though the company is expected to incur lower year-over-year tariff costs in 2020, any re-escalation of tariffs may further put a strain on profits. The firm expects SG&A costs to increase in 2020. Further, increasing competition is a cause of concern. Harley-Davidson is facing competition from small brands and foreign bike makers that are resorting to competitive pricing.
Declining cash flow amid falling net income is a dampener. The firm’s full-year operating cash flow declined 28% year over year in 2019. The trend is likely to continue amid rise in costs and declining sales. Moreover, capital expenditure in 2020 is projected to increase year over year in the band of $215-$235 million, which may further clip cash flows. As it is, the company carries a huge debt burden of $4.88 billion, representing a leverage of 74%, which restricts the firm’s financial flexibility and limits growth.
Weak results in the financial services division is also a concern. Operating income from its financing arm decreased 8.6% in 2019. At HDFS, the firm expects higher credit losses in 2020. Even though the firm’s financing division forms a small portion of overall profits, it could be a potential red flag if consumers struggle to make payments. Lower profits at the financing arm are expected to weigh on overall results, going forward.
To add to the concerns, management’s turmoil due to the resignation of CEO Matthew Levatich late last month and the novel coronavirus outbreak is weighing on the stock.
Can the Stock Turnaround?
Indeed, Harley-Davidson is grappling with numerous challenges. However, its long-term growth objectives to expand the product portfolio and customer base are appreciable. The firm will be launching motorcycle models and technologies that better align with market trends, and the tastes of younger generations. The model launches — in sync with its “More Roads to Harley-Davidson” growth plan — include LiveWire, Low Rider S and CVO Tri Glide. By 2027, the company aims at launching 100 motorcycles. It plans to boost its prospects by launching lighter motorcycles and bolstering dealer networks. In addition to adding dealerships globally, the company also launched a program to improve response time, and the quality of online and in-dealership leads. The firm’s front foot approach to innovation including touring traction control with advanced ABS and H-D Connect is boosting Harley-Davidson’s U.S. leadership in Touring and Cruiser motorcycle markets.
While the Zacks Rank #4 (Sell) company is undertaking several growth initiatives, we are yet to see if these can completely offset the aforementioned hurdles. Until then, investors can count on promising top-ranked stocks like Fox Factory Holding Corp. FOXF, Blue Bird Corporation BLBD and Polaris Industries PII.