Harley Davidson's plan to take iconic American brand into transportation's future
Tesla is trading at record price as Wall Street bets big on EVs, but so is iconic car maker GM. Is Harley Davidson the next undervalued transportation icon?
already have a large presence. The recreational market has become a more intense focus for consumer brands as a result of shifts driven by the pandemic.Nelson also was cautiously optimistic about the manufacturer's prospects in an increasingly electrified future. The LiveWire, Harley's sole current electric motorcycle, shows promise, but the company has been somewhat slow bringing it to market since its release in late 2019, he said.
"More of a concrete strategy on the electric bike, the Livewire, will be necessary," Citi analyst Shawn Collins said, but he added that EVs remain a longer-term rather than immediate financial priority. "EV cycles are a rounding error at the moment," he said of the sales.
The LiveWire retails for nearly $30,000, making it one of Harley's more expensive motorcycle offerings for the2021 model year, which range from $9,500 to $49,000."Over time, we are bullish on the opportunity, given that we think lithium-ion battery costs are going to continue falling in the coming years and electric vehicles are going to be heavily subsidized by the new administration," Nelson said. "We expect the cost of electric vehicles to reach parity with internal combustion engine vehicles by the middle of this decade, as battery costs continue to decline." headtopics.com
Harley-Davidson's share price is at a 52-week high — like many companies in this extended bull market — but remains well below its all-time peak.Arrows pointing outwardsThe company's iconic brand remains attractive, even as its financial fortunes have fluctuated.
"Harley-Davidson is the most valuable motorcycle brand on the planet," wrote Craig Kennison, a senior research analyst and director of research operations at Baird, in a recent research note. Harley's strong brand, scale, and loyal customers give it an advantage over competitors, in his view. Meanwhile, Harley's new leadership has put in place operational changes that should drive growth in 2021, Kennison said, including streamlining its product portfolio, reducing dealer inventory 30%, and instituting ongoing annual costs savings of $115 million. "We increasingly like the investment case for Harley-Davidson," he wrote.
There may be more cost-cutting to come, according to Nelson. He said Harley should look to further shrink its global footprint to focus on markets that are the most profitable with the greatest long-term growth potential. But shrinking the overall footprint does not mean less focus on overseas consumers.
Revving up profits"Right now, they are spread too wide," Nelson said. "Between 2006-2019, the company grew its non-U.S. exposure from 22% of total unit sales volumes to 42%. We think they need to continue growing this percentage out of necessity because we believe its North American market is in secular decline." headtopics.com
Harley's issue is about the top line, or revenue from motorcycle sales, and Citi's Collins said into its earnings and February investor day how management talks about increasing the top line will be a key to continued investor confidence. "Lots of people have faith in Zeitz, but he has a high bar," Collins said. "There is no simple answer. ... The top line has been horrible."
Arrows pointing outwardsThe biggest problem for Harley is well known: the brand has had trouble appealing to younger riders.Younger consumers have shown an aversion to purchasing motorcycles for safety reasons, and vehicles in general due to the rise of ridesharing, as well as financial and urbanization trends, according to Nelson, and Harley's domestic demand has been waning for well over a decade.
"Harley at one point was unstoppable, in the 80s and 90s and even through most of the 2000s," Collins said.The Citi analyst noted Harley competitor Indian Motorcycle, owned byPolaris, has had success bringing in a new audience, and Zeitz has shown his ability to work "marketing magic" when he oversaw the turnaround at Puma, which had lost consumers to Nike and Adidas. "His job is to try and insert the magic back into Harley so a younger person wants to buy one. That's what he has his eye focused on for the next three year to five years," Collins said.
"Harley-Davidson has known for a while that it needs to reach younger customers," said Dennis Chung, the production editor at Motorcycle.com. "The problem is that demographic doesn't necessarily want the same things in a motorcycle that Harley-Davidson's older base values." headtopics.com
A lot will hinge on the next generation of Harley-Davidson's popularSportsterlineup of mid-sized cruisers, according to Chung. "There is definitely value in the classic Harley styling, but it needs to be balanced with modern design and modern technology," he said.
The Sportster lineup has been in continuous production since 1957, and is one of Harley's oldest model lines.The Harley-Davidson Sportster 1200 Custom.Source: Harley-DavidsonOne way Harley-Davidson is responding to a more tricky consumer market is by shifting its focus from growing market share on an absolute basis to increasing brand exclusivity. The Rewire plan was an acknowledgment from management that blanketing the globe in a search for new sales wasn't the way to go.
"Instead of trying to increase its sales volume, Harley-Davidson is now trying to earn more profit from each sale, even if it means selling fewer bikes," Chung said.Harley-Davidson recently reported a 39% increase in net income in the third quarter of 2020, compared to the same period in 2019, even though its global retail motorcycle sales in the third quarter of 2020 were down 8% compared to the prior year.
North American sales did grow in the third quarter for the first time in a long time, Collins noted, and there are broader trends in place that could benefit Harley. Sports and recreational vehicles sales are growing as a result of Covid and that could be a tailwind for the motorcycle market as well.
"They do have the No. 1 brand in the market with 40% market share and the brand is unlike any other," Collins said.The European market, meanwhile, is growing and the new adventure bike Pan America should do well in that region.The decision to reduce its product line by roughly 30% seems like a smart and necessary move, because of overlap. "A lot of Harley's products are very similar. Eliminating some of the lower-performing products creates a more streamlined product portfolio, which helps reduce costs," Chung said. He said it's wise for the company to offer fewer models, but then sell a range of accessories and customization options. This way, buyers can individualize their bikes in details such as paint, luggage, seats, stereo systems, brake upgrades, and other areas.
It's okay to be in a shrinking market, if you're improving the profitability of the products you sell.Jaime Katz, Morningstar analystCollins said Zeitz understands the opportunity in bike parts and Harley lifestyle accessories, and while these are not strategies that can turn the business around at the top line level, they are important pieces in a more comprehensive plan to maximize revenue while keeping costs down and generating higher profits. He recently pegged as much as 15% upside in Harley's stock ahead of next month's earnings and investor day, writing in a note to investors that he continues to be encouraged by new management's decision-making.
The company dropped a handful of models from its 2021 U.S. lineup – the FXDR 114, Low Rider, Breakout, Street Bob 107, Deluxe, Street 750, Street Rod, and Roadster.Even with a trimmed portfolio, the manufacturer still offers two dozen different motorcycles, mostly concentrated in the cruiser and touring market segments, as well as a trio of three-wheeled bikes.
"We believeCovid-19has given Harley the opportunity to press the reset button on its strategy and refocus effort back on its core consumer, one which we believe holds the key to higher profit margins," stated Morningstar senior equity analyst Jaime Katz in her November report on the manufacturer. She praised the Rewire initiative as a means of balancing restoration of the firm's core business and entry into new markets. "Prioritizing profitability over scale should also refocus Harley on the success of high-margin parts and accessories and general merchandise segments," she added.
"It's okay to be in a shrinking market, if you're improving the profitability of the products you sell," Katz told CNBC. Read more: CNBC »
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