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Harley-Davidson: Growth Will Come From Livewire and EMs

July 07, 2014 | About:
Faisal Humayun

Faisal Humayun

3 followers

Harley-Davidson (HOG), the manufacturer of cruiser and touring motorcycles, is looking for new growth avenues. This article discusses the company’s strategy and analyzes if the stock is a good investment.

Project Livewire

Harley-Davidson revealed project livewire, the first electric Harley-Davidson motorcycle in June 2014. The company’s electric motorcycle is still not up for sale. However, the company will have the new motorcycle is more than 30 Harley-Davidson dealerships where prospective buyers can test ride the motorcycle and add their inputs and suggestions. The longer term plans for retail availability of project will be influenced by feedback from riders. The company seems optimistic about the prospects.

I believe that the most important thing here is that the company is moving towards greater innovation to increase its growth. Tesla Motors (TSLA), with its electric cars, has witnessed robust top-line growth. However, the company has still not managed to earn profits and that might be a concern.

I am not comparing Tesla with Harley-Davidson. However, electric motorcycles can find takers in the market if the product offering is exciting enough. That will be known as test rides and feedbacks pour in for the project livewire. From the company’s perspective, the key point would be to ensure that the project is profitable if it does go live in the foreseeable future.

Emerging Markets

For 2013, the number of Harley-Davidson motorcycles sold in North America increased by 4.5% as compared to 2012. The unit sales growth in EMEA region was a negative of 1% in 2013 as compared to 2012. However, the Asia Pacific region growth was robust at 9.8% in 2013 as compared to 2012.

Even for 1Q14, Harley-Davidson’s retail sales grew at a pace of 5.8% worldwide, 3% in the United States and a robust 10.9% in international markets (primarily Asia Pacific).

This is just an emerging trend and will increasingly impact the company’s EPS growth. I mention it as an emerging trend as total sales volume in Asia Pacific was 26,890 units in FY13 and the total sales volume in North America was 179,925 units. Therefore, the developed markets are way ahead when it comes to unit sales. I do believe that China, India and Japan combined will exhibit robust sales growth in the coming years, keeping EPS growth decent.

Healthy Earnings Growth

What I find attractive about Harley-Davidson is an attractive earnings growth profile. In 2013, the company’s earnings grew by 20.6% to $3.28 per share as compared to $2.72 per share in FY12. The company’s earnings growth for 2012 was equally robust at 16.7% as compared to 2011.

The strong earnings grow has continued for Harley-Davidson in 2014 with 1Q14 earnings growing by 22.2% to $1.21 per share as compared to 1Q13. For 2014, analyst estimates suggest an earnings growth of another 20% as compared to 2013. This implies that Harley-Davidson is likely to clock a diluted EPS of 3.94 for 2014.

Harley-Davidson is therefore trading at just 17.5 times its 2014 earnings. I believe that these are attractive valuations considering the fact that the company’s earnings growth in the recent past has been above 20%. Another point that adds to the overall attractiveness is a 1.5% dividend yield, which is likely to remain stable.

Likely Second Half 2014 Rally

Harley-Davidson has been a silent value creator for investors. In the last one year, the stock has given returns of 24% and over the last two years, the stock has given returns of 49%. However, the stock has moved sideways in year to date 2014.

Harley-Davidson is expected to report second quarter earnings on July 22, 2014. The second quarter earnings and the remainder of 2014 can be positive for Harley-Davidson in terms of stock upside if the company is able to maintain its earnings growth at over 20%.

I do believe that it is likely and I expect the stock to end 2014 with strong annual returns. Also, Harley-Davidson might face headwinds in the local markets in the near-term and this will be partially offset by continued growth from Asia Pacific, keeping the sentiments relatively positive.

Conclusion

Harley-Davidson is a brand consumers want to own in emerging markets. The company has launched relatively low priced models to boost sales in countries like India where the market potential is immense. The company’s research & development is also likely to bring positive results over the long-term.

In 2014, the stock has not participated in the broad market rally and this is a good time to consider exposure to the stock. Investors can also wait for 2Q14 results in the third week of July before investing. However, the company’s long-term growth will be driven by innovation and emerging market exposure and long-term investors can stay invested or invest on every small correction.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

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