Company Reports

We have lowered Harley-Davidson’s moat to narrow from wide. We still see brand equity stemming from a long history of innovation, manufacturing experience, and a dealer network that has given Harley a dominant position in the US motorcycle market. However, we think its brand intangible advantage has declined in recent years, lowering our conviction in Harley’s ability to maintain market share and prevent operating margin degradation, resulting in more tepid economic profits ahead.

We are changing Harley-Davidson's moat to narrow from wide. We still see brand equity rising from a history of successful product innovation, manufacturing prowess, and a dedicated dealer network that has given Harley a dominant position in the US motorcycle market. However, we believe its brand intangible advantage has declined in recent years, lowering our conviction in Harley's ability to maintain market share and withstand operating margin headwinds, resulting in more tempered economic profits in the coming decade. For example, Harley said it held 38% share in the US heavyweight motorcycle market in 2023, signaling robust local brand perception. While this is notable, the company had an even greater leadership position prior to the pandemic, with more than 50% share of the heavyweight market between 2009 and 2019, despite the longtime demand shift to mid- and lighter-weight bikes. The downtrend in shipments that has accompanied share losses over the past decade-plus has weighed on the motorcycle segment operating margin, which is set for 11.5% in 2024 versus 18% in 2014. Meanwhile, Harley's ROIC has dropped to 19% from more than 50% a decade ago.

With a long history of manufacturing experience, Harley-Davidson has brand strength and a dealer network that give the firm a wide economic moat and solid position in the US motorcycle market. However, there are no switching costs to protect Harley's brand when consumers replace their bikes, and the premium price Harley commands relative to its peers has proven problematic during cyclical downturns and periods of competitive pricing, hurting Harley's retail sales and shipments. In 2020, as a result of temporary factory shutdowns, dealer closures, and shifted product launches, Harley ceded massive market share. While still a key player, Harley's market share fell around 800 basis points, to 42% in 2020 from above 50% in 2019. And while it recovered 3% of share in 2021, it had again ceded share to 38% in 2023. We plan to monitor Harley's market share to help determine the strength of Harley's brand intangible asset.

Wide-moat Harley-Davidson’s second quarter fared well, considering the languishing demand leisure manufacturers have encountered in recent months. Motor company (HDMC) segment sales (83% of total sales) rose 13%, as shipments grew 16%, offset by parts and accessories and general merchandise segment declines of 10% and 4.5%, respectively. Like other OEMs, HDMC saw 150 basis points of operating margin compression, hurt by higher operating expenses as well as pricing. Although Harley’s shipment growth was lapping an 11% decline last year, we fear that stalled consumer demand and ongoing dealer anxiety around higher interest rates and the cost of financing products may indicate some of these units may move slower than initially planned. If Harley’s anticipated retail sales growth of flat to 3% in 2024 falls short as consumer headwinds linger, it could put unit growth in peril for 2025. For reference, through June, US retail sales rose 2% but declined 2% globally.

With a long history of manufacturing experience, Harley-Davidson has brand strength and a dealer network that give the firm a wide economic moat and solid position in the US motorcycle market. However, there are no switching costs to protect Harley's brand when consumers replace their bikes, and the premium price Harley commands relative to its peers has proven problematic during cyclical downturns and periods of competitive pricing, hurting Harley's retail sales and shipments. In 2020, as a result of temporary factory shutdowns, dealer closures, and shifted product launches, Harley ceded massive market share. While still a key market player, Harley's market share fell around 800 basis points, to 42% in 2020 from above 50% in 2019. And while it recovered 3% of share in 2021, it had again ceded share to 38% in 2023. We plan to monitor Harley's market share to help determine the strength of Harley's brand intangible asset.

Demand for consumer durable goods remains bounded by higher financing costs, affecting performance at companies like wide-moat Harley-Davidson. The company reported first-quarter results of $1.48 billion in motor company sales and $1.72 in adjusted EPS that narrowly edged our $1.42 billion and $1.71 respective estimates. Total sales fell 5% on a 7% decline in shipments and a 3% decline in pricing (attributable to the removal of pricing surcharges and promotional uptick) but benefited from a positive mix shift. The lower volume made cost absorption difficult, rendering a motorcycle operating margin of 16.2%, a 540-basis-point contraction, wider than the 220 basis points we expected. As dealers across the recreational vehicle landscape continue to be plagued by higher floorplan financing costs, they continue to remain cautious about taking new units. This remains the key normalization concern for all manufacturers on our RV coverage list and is unlikely to trend favorably until late 2024 given Fed rhetoric, keeping a meaningful demand turnaround at bay.

With a long history of manufacturing experience, Harley-Davidson has brand strength and a dealer network that give the firm a wide economic moat and solid position in the U.S. motorcycle market. However, there are no switching costs to protect Harley's brand when consumers replace their bikes, and the premium price Harley commands relative to its peers has proven problematic during cyclical downturns and periods of competitive pricing, hurting Harley's retail sales and shipments. In 2020, as a result of temporary factory shutdowns, dealer closures, and shifted product launches, Harley ceded massive market share. While still a significant market player, Harley's market share fell roughly 800 basis points, to 42.1% in 2020 from above 50% in 2019. And while it recovered 3% of share in 2021, it has again ceded share to 38% in 2023. We plan to monitor Harley's market share position to help determine the strength of Harley's brand intangible asset.

Wide-moat Harley-Davidson's fourth-quarter results and 2024 outlook echoed consumer hesitancy patterns seen recently by other leisure goods manufacturers. In the fourth quarter, Harley motorcycle shipments fell 13% and electric shipped a mere 514 units, signaling dealer caution. Motor company gross margin felt the most pressure, down 360 basis points, to 22.9%, hurt by weak cost absorption and higher promotions, despite better mix and input costs. This led to a negative 6% motorcycle operating margin in the seasonally small period. For the first time since 2020 Harley saw price declines, a key factor we plan to watch given that it can signal the brand’s relevance with consumers. Although these results were mostly in line with our preprint expectations, we plan to lower our $43.50 fair value estimate by a high-single-digit rate to account for conservative near-term spending patterns on leisure products and a lower long-term outlook for electric units, still rendering shares cheap.

With a long history of manufacturing experience, Harley-Davidson has brand strength and a dealer network that give the firm a wide economic moat and dominant position in the U.S. motorcycle market. However, there are no switching costs to protect Harley's brand when consumers replace their bikes, and the premium price Harley commands relative to its peers has proven problematic during cyclical downturns and periods of competitive pricing, hindering Harley's retail sales and shipments. In 2020, as a result of temporary factory shutdowns, dealer closures, and shifted product launches, Harley ceded massive market share. While still a significant market player, Harley's market share fell roughly 800 basis points, to 42.1% in 2020 from above 50% in 2019. And while it recovered 3% of share in 2021, it again ceded 400 basis points in 2022 (to 41%). We plan to monitor Harley's market share position to help determine the strength of Harley's brand intangible asset.

Wide-moat Harley-Davidson failed to escape the macroeconomic headwinds that have been pervasive across the discretionary landscape in its third quarter. Moreover, given rising evidence that softer consumer spending is likely to persist, we think it is prudent to modestly decrease our 3% sales and 14% motorcycle operating margin estimates in 2024. As such, we plan to lower our $46.50 fair value estimate by a high-single-digit rate, which will still render shares undervalued. However, we'd caution investors that sentiment on the stock may not turn until consumer confidence stabilizes (facilitated by flat or declining interest rates), given the highly volatile macroeconomic environment. Shares are trading down 9% after earnings and 36% in 2023 as consumer spending on services has continued to outpace goods, and we don't believe spending on recreational products will turn around imminently (indeed, we think the powersports industry should prove virtually flat over the next five years).

With a long history of manufacturing experience, Harley-Davidson has brand strength and a dealer network that give the firm a wide economic moat and dominant position in the U.S. motorcycle market. However, there are no switching costs to protect Harley's brand when consumers replace their bikes, and the premium price Harley commands relative to its peers has proven problematic during cyclical downturns and periods of competitive pricing, hindering Harley's retail sales and shipments. In 2020, as a result of temporary factory shutdowns, dealer closures, and shifted product launches, Harley ceded massive market share. While still a significant market player, Harley's market share fell roughly 800 basis points, to 42.1% in 2020 from above 50% in 2019. And while it recovered 3% of share in 2021, it again ceded 400 basis points in 2022 (to 41%). We plan to monitor Harley's market share position to help determine the strength of Harley's brand intangible asset.

We expect to lower our $47.50 fair value estimate for wide-moat Harley-Davidson by $1-$2 after incorporating second-quarter performance and an updated full-year outlook into our model. The firm’s second quarter was plagued by a manufacturing halt that led to an 11% decline in shipments, the impact of which was muted by an 8% increase in average selling price. However, operating profitability at the motor segment held up well at 16.2%, down 60 basis points versus last year but 220 basis points higher than in 2021, as the firm continues to focus on curating products with the best returns. The electric segment remains a drag, shipping just 33 units ahead of the third-quarter launch of the Del Mar electric motorcycle, leading to accelerating operating losses in that line. The idiosyncratic issues in the period led Harley to trim its 2023 outlook for motor sales growth to 0%-3% (from 4%-7%), motor operating margins to 14.1%-14.3% (from 14.1%-14.6%), and electric shipments to 600-1,000 (from 750-2,000). We plan to adjust our existing forecast—for 5% motor sales growth, 14.5% motor operating margin, and around 860 electric shipments—to be closer to guidance.

With a long history of manufacturing experience, Harley-Davidson has brand strength and a dealer network that give the firm a wide economic moat and dominant position in the U.S. motorcycle market. However, there are no switching costs to protect Harley's brand when consumers replace their bikes, and the premium price Harley commands relative to its peers has proven problematic during cyclical downturns and periods of competitive pricing, hindering Harley's retail sales and shipments. In 2020, as a result of temporary factory shutdowns, dealer closures, and shifted product launches, Harley ceded massive market share. While still a significant market player, Harley's market share fell roughly 800 basis points, to 42.1% in 2020 from above 50% in 2019. And while it recovered 3% of share in 2021, it again ceded 400 basis points in 2022 (to 41%). We plan to monitor Harley's market share position to help determine whether Harley's wide moat rating deserves to stay intact.

Wide-moat Harley-Davidson printed impressive sales and profit margins at its motor company segment in its first quarter, benefiting from efforts to refocus on high return products as well as sell in to its 120th anniversary year. Motor company sales rose 21%, with volume contributing 12% growth and price adding 8% upside (net mix and currency accounted for the balance), which helped the segment deliver a 21.6% operating margin—a whopping 470-basis-point expansion. However, two factors temper our excitement. For one, the first quarter should represent the peak operating margin for the motor company segment in 2023, with the metric declining over the rest of the year. The second factor is Harley’s continued overall share losses in the motorcycle market (North American retail sales declined 17%), with Harley representing less than 40% of market share in the first quarter as consumers continue to shift away from heavy bikes. While Harley still represents above 70% market share in touring and cruising industries, such bikes represent a lower portion of the total market, signaling a secular shift in preferences.

With a long history of manufacturing experience, Harley-Davidson has brand strength and a dealer network that give the firm a wide economic moat and dominant position in the U.S. motorcycle market. However, there are no switching costs to protect Harley's brand when consumers replace their bikes, and the premium price Harley commands relative to its peers has proven problematic during cyclical downturns and periods of competitive pricing, hindering Harley's retail sales and shipments. In 2020, as a result of temporary factory shutdowns, dealer closures, and shifted product launches, Harley ceded massive market share. While still a significant market player, Harley's market share fell roughly 800 basis points, to 42.1% in 2020 from above 50% in 2019. And while it recovered 3% of share in 2021, it again ceded 400 basis points in 2022 (to 41%). We plan to monitor Harley's market share position to help determine whether Harley's wide moat rating deserves to stay intact.

We plan to raise our $47 fair value estimate for wide-moat Harley-Davidson by a mid-single-digit rate after digesting fourth-quarter results and see shares as fairly valued after a high-single-digit post-print pop. While we think that shares have rallied on an improving profit outlook for the company, we believe that the enterprise value is inextricably tied to the electric business, which is likely to drag on total performance over the next few years. Harley printed a strong fourth quarter, with sales rising 12% to $1.14 billion, as shipments at the motor company segment (heavyweight bikes) rose 18%. Higher volume and prices led to better profitability, with the segment printing a motorcycle operating margin decline of 3.5%, a 680-basis-point year-over-year improvement in the seasonally small quarter. However, both the financial services (HDFS) and LiveWire (LW) segments struggled. HDFS operating income declined 32% (below our estimated 21% downtick), suffering from higher losses and funding expenses. LW shipments contracted 63% and segment operating margin loss of $29 million was wider than the $20 million loss in the year-ago period given limited shipments (69 units).

With a long history of manufacturing experience, Harley-Davidson has brand strength and a dealer network that give the firm a wide economic moat and dominant position in the U.S. motorcycle market. However, there are no switching costs to protect Harley's brand when consumers replace their bikes, and the premium price Harley commands relative to its peers has proven problematic during cyclical downturns and periods of competitive pricing, hindering Harley's retail sales and shipments. In 2020, as a result of temporary factory shutdowns and dealer closures (as well as the pushback of product launches until spring 2021), Harley ceded massive market share. While still a significant market player, Harley's market share fell roughly 800 basis points, to 42.1% in 2020 from above 50% in 2019. Thankfully, it recovered 3% of share in 2021, a gain that it should maintain with the introduction of new products. We plan to monitor Harley's market share position to help determine whether Harley's wide moat rating deserves to stay intact.

Wide-moat Harley-Davidson delivered impressive third-quarter sales and profits, as unit throughput accelerated following the firm’s second-quarter production suspension. Motorcycle sales rose 28% to $1.1 billion, driven by 19% unit and 7.5% price growth. This led to massive expense leverage, with cost of goods sold contracting 740 basis points (to 66%) and selling, general, and administrative costs down 210 basis points (to 16%). In turn, Harley was able to post a nearly 18% motorcycle operating margin, a third-quarter mark unseen since 2007. With the company’s full-year outlook for motorcycle company sales rising 5%-10% and operating margin of 11%-12% unchanged, the fourth quarter is likely to see motorcycle revenue grow at a low-double-digit pace with mid-single-digit negative operating margin (which would be a marked improvement from a 12.3% operating loss in the fourth quarter of 2021), by our calculations. We expect to increase our $43 fair value estimate for Harley by a high-single-digit rate to account for third-quarter outperformance and view shares as modestly undervalued, even after a double-digit post-print pop.

With a long history of manufacturing experience, Harley-Davidson has brand strength and a dealer network that give the firm a wide economic moat and dominant position in the U.S. motorcycle market. However, there are no switching costs to protect Harley's brand when consumers replace their bikes, and the premium price Harley commands relative to its peers has proven problematic during cyclical downturns and periods of competitive pricing, hindering Harley's retail sales and shipments. In 2020, as a result of temporary factory shutdowns and dealer closures (as well as the pushback of product launches until spring 2021), Harley ceded massive market share. While still a significant market player, Harley's market share fell roughly 800 basis points, to 42.1% in 2020 from above 50% in 2019. Thankfully, it recovered 3% of share in 2021, a gain that it should maintain with the introduction of new products. We plan to monitor Harley's market share position to help determine whether Harley's wide moat rating deserves to stay intact.

Although wide-moat Harley-Davidson was plagued by a two-week production hold (due to a third-party supplier issue), it was able to print 15.1% motorcycle operating margins in the second quarter, nearly back to 2019’s profit level, and displaying a 120-basis-point expansion despite inflationary and economic headwinds. The halt led to shipment declines of 15% (to 48,000) and bike revenue downtick of 9%, but total revenue contracted just 5% benefiting from price increases and robust growth in apparel, licensing, and other revenue (9% of period sales). Harley reaffirmed its full-year goals, implying shipment losses from the production pause will be recovered in the back half of 2022. With the firm forecasting motorcycle revenue growth of 5%-10% in 2022, second-half sales increases of around 10% are feasible if production remains intact. Our confidence in demand is bolstered by Harley’s ability to capture pricing, as average selling prices rose 7%, indicating the appetite for the company’s product remains intact.