Capital-Light Financing Shift Will Pressure Earnings Yet Unlock Long-Term Cash Flow Upside

Catalysts

About Harley-Davidson

Harley-Davidson designs, manufactures and sells heavyweight motorcycles, related products and financial services through a global dealer network.

What are the underlying business or industry changes driving this perspective?

• Although the capital-light transformation of Harley-Davidson Financial Services unlocks over $1.2 billion in discretionary cash by early 2026 and should structurally lift returns on equity, reinvestment risk remains if organic initiatives in motorcycles and LiveWire fail to convert that cash into durable revenue and earnings growth.
• Although the refreshed Softail and noncore portfolios are gaining share in large cruisers and select regions, persistent affordability pressures, higher interest rates and consumers trading down to lower price points threaten to cap unit growth and constrain Motor Company revenue.
• Although the company is executing on a multi year productivity and cost program expected to exceed $357 million in savings by 2026, rising tariff costs and modest input inflation could continue to erode gross margin improvements, limiting operating margin and earnings upside.
• Although new lower entry price points, extended term financing and the upcoming Sprint bike aim to attract younger and more diverse riders, demographic headwinds in core heavyweight segments and intense competition in lightweight and smaller bikes may restrain long term volume growth and dilute net margins.
• Although the HDFS partnership with KKR and PIMCO should generate recurring origination and servicing fee income starting in 2026, the shift off balance sheet and exposure to broader consumer credit cycles could increase earnings volatility and temper future operating income.

Assumptions

This narrative explores a more pessimistic perspective on Harley-Davidson compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Harley-Davidson's revenue will decrease by 8.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 10.7% today to 5.4% in 3 years time.
• The bearish analysts expect earnings to reach $192.8 million (and earnings per share of $2.21) by about December 2028, down from $501.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $335.9 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.9x on those 2028 earnings, up from 4.9x today. This future PE is lower than the current PE for the US Auto industry at 19.9x.
• The bearish analysts expect the number of shares outstanding to decline by 5.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If Harley-Davidson successfully leverages the $1.2 billion to $1.25 billion of discretionary cash unlocked from the HDFS capital-light transaction into high return organic growth initiatives in HDMC and LiveWire, earnings and return on equity could rise meaningfully over the long term, supporting a higher share price via stronger net income and cash flows.
• If the refreshed Softail lineup, new Sprint bike and lower psychological price points such as 9 thousand 999 and 19 thousand 999 resonate with younger and more value conscious riders, the company could overcome demographic headwinds and affordability constraints, driving sustained unit growth and higher Motor Company revenue.
• If the global dealer network returns to robust profitability, helped by lower inventory levels, targeted financing promotions and the marketing development fund, dealer health could materially improve, supporting stronger retail demand, better pricing power and expansion of operating margins.
• If LiveWire continues to scale volumes from products like the S4 Honcho while narrowing operating losses and benefiting from lower cash burn, the electric segment could evolve from a drag into a contributor, adding incremental revenue growth and reducing the pressure on consolidated earnings.
• If HDFS grows stable fee based origination and servicing income under the forward flow agreement while maintaining disciplined credit performance despite consumer cycle volatility, the business could deliver resilient operating income growth that lifts consolidated earnings per share over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Harley-Davidson is $20.0, which represents up to two standard deviations below the consensus price target of $27.5. This valuation is based on what can be assumed as the expectations of Harley-Davidson's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $32.0, and the most bearish reporting a price target of just $20.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $192.8 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of $20.9, the analyst price target of $20.0 is 4.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.