24 Jun 2022

Under the Spotlight Wall St: Harley-Davidson (HOG)

As the most iconic motorcycle manufacturer in the world, Harley-Davidson has faced two world wars and several economic crises. But will it fail to adapt to the pandemic, like so many companies of its time?

In the late 19th and early 20th centuries, bicycles were taking over U.S. and European cities – much like modern-day Amsterdam. However, there was one significant drawback: they lack the speed of an automobile. Trying to solve this problem, childhood friends William Harley and Arthur Davidson developed the first prototype that laid the foundation of Harley-Davidson.

Still, it had a long way to go before becoming the brand synonymous with motorcycles around the world. Former American motorsports racer Bobby Unser once said, “success is where preparation and opportunity meet”. For Harley-Davidson, opportunity came in the form of two world wars. In 1917, when the United States entered World War I, it ordered more than 20,000 motorcycles from Harley-Davidson. The troops loved using them as a means of quick and efficient transportation. As a result, the American public became increasingly familiar with the brand and the soldiers coming home were already in love.

With the onset of the Great Depression in 1929, the company saw its sales drop by 82%. Even so, the company persevered as one of only two motorcycle manufacturers (alongside its main competitor, Indian) to survive the largest economic crisis in U.S. history. With the arrival of World War II in the West in 1938, the company would once again meet the call of its government and in exchange became an icon of the ‘Greatest Generation’.

A Star Is Born

During World War II, Harley-Davidson sold more than 90,000 motorcycles to the Allies, catapulting production to unprecedented levels. Upon returning to the U.S., veterans could purchase their motorcycles used in Europe and Asia at affordable prices, allowing the company to consolidate its popularity in the U.S.

In the post-war period, the company would establish itself as a counterculture icon thanks to films like The Wild One, starring Marlon Brando, and Easy Rider, with Peter Fonda and Dennis Hopper piloting their choppers along American roads. Glorified by Hollywood, Harley-Davidson would no longer just sell motorcycles: it would sell a lifestyle for rebels and non-conformists with modern society.

Twilight Of An Idol

Associating your brand with a lifestyle can help a company to retain its customers: they’re no longer just buyers but rather loyal defenders of the company, identifying with its values and aesthetics. As a result of being a lifestyle brand, Harley-Davidson built a true fanbase, selling a rebellious and bold style.

The big problem with linking the brand to just one niche in society is that eventually that niche can stop growing. In the case of Harley-Davidson, that’s exactly what happened.

If in 1985 the average age of a Harley owner was 27 years old, it is currently 50 years old, according to 2018 data from the company itself. That was the last year it disclosed such information. While Japanese companies such as Honda and Yamaha have been making commercials that are inclusive of women and different ethnicities since the 70s, Harley-Davidson has not. In fact, it is still focused on its audience of white men and renegades by society. It’s a shrinking audience, as people move away from this demographic and, with it, noisy motorcycles. Particularly bikes that consume a lot of petrol without being backed by engine power, which could be one of the reasons for the company’s revenue decline.

The Fall

Since 2017, Harley-Davidson’s revenue has fallen from US$5.6 billion to US$4b in 2020. While management remains hopeful, with the group forecasting US$9.4b in revenue for 2022, the company has a long fight ahead, especially with the current global economic climate. This is because a Harley is considered a ‘premium’ product. In the U.S. the average price of a motorcycle is approximately US$11,900, but a Harley will set you back US$20,000.

Unfortunately it isn’t as simple as just lowering prices. For decades, Harley-Davidson has equated its brand and quality with ‘made in the USA’. Any attempt by the company to move manufacturing out of the country to lower prices would cause significant customer backlash. So for now, Harley-Davidson seems to be stuck between a rock and a hard place, with no easy solution in sight.

Change Of Route

The motorcycle market in the U.S. is worth approximately US$5b per year, with the 600cc plus market dominated by Harleys (47% market share as of Q1CY22). But if the U.S. market looks big, it pales in comparison to a global market that turns over US$100b annually. If Harley-Davidson wants to grow, expansion into other countries is critical.

North America currently represents about two-thirds of the company’s sales. In Q1CY22, the company sold 45,200 motorcycles, but only 6,700 were sold in the Asia Pacific and 6,300 were sold across Europe, the Middle East and Africa (EMEA). So while Harley-Davidson is aware of the global market’s potential, it still has a long way to go.

One problem with breaking into Europe and Asia is that these markets are focused on phasing out combustion engine technology for all new vehicles sold. But hopefully this isn’t a problem for long: Harley-Davidson launched its EV model Livewire in 2020. It doesn’t come cheap – the model starts at US$29,799 – but it is the first such vehicle by the company and, if it follows the electric car market, it can only get cheaper in the future.

Closed Curve?

Harley-Davidson ($HOG) forecasts between 5% and 10% year-on-year revenue growth in 2022, generating an operating profit margin of 11% or 12%. While the growth forecast is small, it must be remembered that this is a turnaround story. Over the last five years, Harley-Davidson’s revenue has fallen by an average of 3.3% year-on-year, with an average operating profit margin of only 7.8%.

The market seems fairly confident in these projections, as management reaffirmed them for the year in 1Q22’s report. Nevertheless, there are risks, especially if the world enters a recession as many analysts fear. So is it time for Harley-Davidson to get off the bike, or is there still plenty of road ahead?

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.