Change is the new atmosphere at Harley-Davidson Inc. (HOG, Financial). Next month, Matt Levatich takes over as president and chief executive officer. Dealers seem to feel good about this change, and unions are prepared to work along with the new CEO too. But how does this change of management affect the stock, if at all, and where do the company’s stock prices go from here?
Increasing customer base
One of the challenges for the company that already controls 50% of the domestic market is to further grow its customer base. From its typical customer profile – white males over 35 years old – Harley is trying to attract many different kinds of new customers: young adults, women, African-Americans and Hispanics. This exercise of targeting a new demography, instead of repeat sales to existing core customers, seems to be working better. The company’s growth of sales to the new demography increased at twice the rate of growth of sales to core customers for three years running through to 2014.
International markets are another source of new customers for the company, and have shown much higher rates of growth than the domestic market. The Asia-Pacific region, driven by growing demands from India specifically, has seen the fastest growth in last financial year whose last quarter saw the region’s sales revenues grow by over 14%. As the company expands its network of dealerships internationally and provides better selection across its international dealerships, this trend should continue in the years to come.
Going electric
It is in the new segment of electric bikes that Harley-Davidson faces a serious challenge from Polaris Industries Inc. (PII, Financial) which acquired Oregon-based electric bike maker Brammo earlier this year, in January. This gives Polaris the jumpstart on the e-bike market and it has already announced plans, using assets acquired from Brammo, to start production of electric motorcycles in the second half of this year. By comparison, Harley-Davidson’s LiveWire Project is still a work in progress and the company is still trying to gauge customer interest before it decides to go ahead with production. However, so far, it has been received in the U.S. with much enthusiasm and is now touring Europe.
Harley-Davidson may not be the early bird to this party but seems to have a secure place for itself nonetheless in a segment that is certain to grow several-fold in the next decade or two.
The numbers speak
According to the company’s guidance for 2015, it expects to ship 285,000 units this year, a growth of 5% from 2014. Analysts expect the revenue growth for the same period to be at 5% also and expect revenue to grow by another 6% in 2016, which is faster than the motorcycle industry in total. Despite higher spending on marketing and a strong dollar hurting international operations, Harley-Davidson maintains a strong cash flow of less than 15x. The company also has a decent dividend yield of about 2% and has an aggressive buyback program, reducing its stock count by about 7% since the start of 2013.
Conclusion
The low price of oil may incentivise some potential motorcycle customers to purchase a car instead, but that is a short-term concern. So is a strong dollar hurting the international business? But given the brand value the company enjoys and the new demography and markets it is targeting, this is sure to be a success story in the long term. We recommend a BUY for the two-wheeler giant.
