Innovative Strategies And EV Focus Propel Brand Strength In Competitive Markets

Key Takeaways

• Strategic reduction in dealer inventory and continued focus on high-margin products aim to improve financial performance and dealer health.
  
• Investments in EV motorcycle manufacturing and performance differentiation highlight a focus on innovation, sustainability, and broadening clientele.
  
• High interest rates, inconsistent geographic sales, dealer inventory strategies, LiveWire's losses, and a narrow focus on performance features present multifaceted financial risks.

Catalysts

Manufactures and sells motorcycles in the United States and internationally.

• The reduction in dealer inventory by approximately 30% is expected to improve dealer health and floor plan expansion, positively affecting financial performance through reduced costs and potentially higher per-unit profitability. This reduction counters the high interest rate environment's adverse effects by aligning inventory levels with actual market demand, enhancing operational efficiency.
  
• Continued focus on the Hardwire strategic pillar and profit focusing on strong mix and growth in Touring, particularly CVO models, demonstrates a commitment to high-margin products and market segments expected to boost revenue and net margins despite challenging market conditions.
  
• Significant market share gains in the 601+cc segment and the positive reception of new Touring motorcycles highlight brand strength and product appeal, which are key to driving demand and potentially increasing revenue through higher unit sales and sustaining premium pricing.
  
• The emphasis on performance as a key differentiator for Harley-Davidson, backed by involvement in the King of the Baggers racing series and strong customer interest in performance features, highlights a strategic direction aimed at capturing a broader clientele. This focus is expected to fuel revenue growth by attracting new customer segments and supporting premium pricing strategies.
  
• The Department of Energy grant of $89 million for facility investment not only strengthens operations but also underpins Harley-Davidson's commitment to EV motorcycle manufacturing. This grant supports long-term growth potential through innovation and sustainability, aligning with industry trends towards electrification, which could increase revenue streams and improve net margins by leveraging government funding for capital-intensive projects.

Assumptions

• Analysts are assuming Harley-Davidson's revenue will decrease by -6.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.4% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $622.3 million (and earnings per share of $5.35) by about August 2027, down from $677.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $526.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.6x on those 2027 earnings, up from 7.3x today. This future PE is lower than the current PE for the US Auto industry at 14.6x.
• Analysts expect the number of shares outstanding to decline by 7.1% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.74%, as per the Simply Wall St company report.

Risks

• The high interest rate environment poses a significant risk by potentially reducing consumers' willingness to engage in big-ticket discretionary purchases, like motorcycles, which could negatively affect revenue and net margins.
  
• Geographic market performance shows inconsistency, with notable declines in regions such as Asia Pacific primarily due to China, which may lead to reduced international sales and impact overall revenue.
  
• The reliance on dealer inventory reductions (approximately 30% versus current levels) to balance retail and wholesale expectations could result in excessive optimism about market demand, potentially impacting revenue if the market does not rebound as expected.
  
• LiveWire's operating loss, although improving, highlights ongoing financial risk in the electric motorcycle segment, which could continue to drain resources and impact net margins if not reversed.
  
• A noted shift toward focusing on performance in motorcycle features, while currently popular, may narrow the brand's market appeal or require increased investment in niche markets, potentially affecting long-term revenue and profit margins.

Valuation

• The analysts have a consensus price target of $42.06 for Harley-Davidson based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $50.0, and the most bearish reporting a price target of just $33.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.8 billion, earnings will come to $622.3 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of $37.54, the analyst's price target of $42.06 is 10.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.