The motorcycle industry and the oil industry have an interesting relationship.
When gas prices are high, many consumers turn to motorcycles to bring their transportation budgets under control. They will sometimes choose other options, such as riding bicycles, walking or taking public transportation, but many consumers prefer the freedom of personal vehicle ownership; thus, when gas prices are high and cars are seen as too expensive to operate, sales of fuel-efficient motorcycles go up, sometimes way up.
It isn’t a one-size-fits-all solution, of course. A motorcycle is not an adequate substitute for a family car, but it is an option for some consumers.
In the recession year of 2008, when gas prices approached – and, in some places, exceeded – $4 per gallon, U.S. motorcycle sales boomed, according to the Motorcycle Industry Council (MIC).
When gas prices are low, as they have been since 2014, consumers tend not to worry about gas mileage, and motorcycle sales decline. The MIC reported a nearly 41% decline in motorcycle sales from 2008 to 2009. Sales rebounded modestly from 2010 to 2015, but the situation has changed as lower gas prices increasingly are seen as the new normal.
Consumers were more conditioned for high gas prices a few years ago than they are now, and their reluctance to give up cars and trucks could be seen in a Gallup survey in 2012 that indicated Americans were willing to pay more than $5 per gallon before making significant lifestyle changes. In early 2012, the national average price per gallon was about $3.80.
About a year before that survey Gallup reported that many consumers were likely to change to more fuel-efficient vehicles if prices kept rising. Recent surveys have suggested that consumers’ threshold has fallen well below $3 per gallon.
Many analysts believe gas prices will remain low for the rest of this year and possibly into 2017, but if the trend reverses itself, history indicates that the motorcycle market could benefit.
Is this a good time to invest in motorcycle companies?
Low gas prices can be a double-edged economic sword. Consumers have largely benefited from the reduced impact on their wallets, but recreational products makers, including motorcycle companies like Harley-Davidson (HOG, Financial), a Milwaukee-based motorcycle maker, have struggled.
Harley-Davidson reported a 5.2% sales decline in the second quarter, but the company is nothing if not resilient. It was one of only two motorcycle companies to survive the Great Depression – the other was Massachusetts-based Indian Motorcycle, which went bankrupt in 1953. The Indian brand name has been resurrected periodically with limited success by other companies, the most recent being Minnesota-based Polaris Industries (PII, Financial).
The news wasn’t all bad for Harley-Davidson. Earnings per share went up 11 cents to $1.55, exceeding analysts’ expectations by 2 cents, and the company’s U.S. market share was up two points from a year ago to 49.5%. Still, the company cut its full-year shipment outlook by 5,000 to 264,000 units, and it reduced its operating margin from 16% to 17% to a range of 15% to 16%.
And market share, while up compared to a year ago, was down from 50.9% in the first quarter.
Harley-Davidson’s leading shareholder among the gurus is Dodge & Cox with a stake of 9,327,733 shares. The stake is 5.15% of Harley-Davidson’s outstanding shares and 0.47% of Dodge & Cox’s total assets.
Harley-Davidson has a price-earnings (P/E) ratio of 13.79, a forward P/E of 13.87, a price-book (P/B) ratio of 4.73 and a price-sales (P/S) ratio of 1.67. GuruFocus gives Harley-Davidson a Financial Strength rating of 5/10 and a Profitability and Growth rating of 7/10 with return on equity (ROE) of 31.47% that is higher than 92% of the companies in the Global Recreational Vehicles industry and return on assets (ROA) of 6.85% that is higher than 71% of the companies in that industry.
Harley-Davidson sold for $53.49 per share Friday. The DCF Calculator gives Harley-Davidson a fair value of $41.52.
Polaris makes snowmobiles, all-terrain vehicles (ATV) and neighborhood electric vehicles (NEV) in addition to motorcycles, which it manufactures through its Iowa-based Victory Motorcycles subsidiary. Polaris bucked the industry trend in the second quarter with an increase of 23% in overall motorcycle sales.
Columbia Wanger (Trades, Portfolio), with a stake of 1,249,572 shares, is Polaris’ leading shareholder among the gurus. The stake is 1.95% of Polaris’ outstanding shares and 1.33% of Columbia Wanger (Trades, Portfolio)’s total assets.
Polaris has a P/E of 16.54, a forward P/E of 15.87, a P/B of 6.61 and a P/S of 1.36. GuruFocus gives Polaris a Financial Strength rating of 7/10 and a Profitability and Growth rating of 7/10 with ROE of 41.20% that is higher than 96% of the companies in the Global Recreational Vehicles industry and ROA of 16.47% that is higher than 94% of the companies in that industry.
Polaris sold for $95.26 per share Friday. The DCF Calculator gives Polaris a fair value of $134.47 with a 29% margin of safety.
Japan-based Yamaha (TSE:7272, Financial) isn’t exclusively a motorcycle company. It makes and sells other motorized products like boats and snowmobiles, but motorcycles have long been the company’s largest division. The company’s overall earnings for the first half of fiscal year 2016 were down 94% compared to the same point in fiscal year 2015.
Suzuki has a P/E of 11.00, a P/B of 1.17 and a P/S of 0.36. GuruFocus gives Suzuki a Financial Strength rating of 6/10 and a Profitability and Growth rating of 6/10 with ROE of 11.29% that is higher than 62% of the companies in the Global Auto Manufacturers industry and ROA of 4.18% that is higher than 52% of the companies in that industry.
Suzuki sold for 1,730 yen ($16.98 in U.S. currency) per share Friday. The DCF Calculator gives Suzuki a fair value of 1,683.37 yen.
Many of the most familiar names in the motorcycle industry also make cars.
Suzuki (TSE:7269, Financial), a Japanese two-wheel and four-wheel vehicle manufacturer, may have benefited from that diversity. It reported an increase in its first-quarter profit of nearly 20%, but net sales were down nearly 2%.
T. Rowe Price Japan is Suzuki’s only shareholder among the gurus with 297,500 shares in its portfolio.
Suzuki has a P/E of 14.13, a P/B of 1.53 and a P/S of 0.53. GuruFocus gives Suzuki a Financial Strength rating of 6/10 and a Profitability and Growth rating of 7/10 with ROE of 9.80% that is higher than 86% of the companies in the Global Auto Manufacturers industry and ROA of 4.02% that is higher than 51% of the companies in that industry.
Suzuki sold for 3,320 yen per share Friday. The DCF Calculator gives Suzuki a fair value of 2,730.6 yen.
Honda (HMC, Financial), a Tokyo-based maker of both motorcycles and cars, announced first-quarter earnings that exceeded expectations, but it acknowledged that motorcycle sales revenue was down more than 8% compared to the same period a year ago.
HOTCHKIS & WILEY is Honda’s leading shareholder among the gurus with nearly 9 million shares in its portfolio. The guru’s stake is 0.5% of Honda’s outstanding shares and 1.03% of the guru’s total assets.
Honda has a P/E of 15.71, a forward P/E of 11.34, a P/B of 0.81 and a P/S of 0.36. GuruFocus gives Honda a Financial Strength rating of 6/10 and a Profitability and Growth rating of 6/10 with ROE of 4.76% that is lower than 66% of the companies in the Global Auto Manufacturers industry and ROA of 1.83% that is lower than 67% of the companies in that industry.
Honda sold for $28.96 per share Friday. The DCF Calculator gives Honda a fair value of $17.31.
BMW (MIL:BMW, Financial), which also makes cars as well as motorcycles (branded BMW Motorrad), reported a 40% motorcycle sales drop in May compared to May 2015.
BMW has a P/E of 7.66, a forward P/E of 7.91, a P/B of 1.17 and a P/S of 0.55. GuruFocus gives BMW a Financial Strength rating of 5/10 and a Profitability and Growth rating of 7/10 with ROE of 15.93% that is higher than 74% of the companies in the Global Auto Manufacturers industry and ROA of 3.90% that is higher than 50% of the companies in that industry.
BMW sold for 77.85 euros ($86.28 in American money) per share Friday. The DCF Calculator gives BMW a fair value of 262.17 euros with a margin of safety of 70%.
Disclosure: I own no shares in any of the stocks mentioned in this article.
Start a free seven-day trial of Premium Membership to GuruFocus.
