Harley-Davidson (HOG, Financial) has a durable competitive advantage in the motorcycle industry, with more than 100 years of manufacturing expertise, brand strength from a large dealer network and owns close to 50% of the market, but who cares?
Motorcycles are such a niche part of the automobile market as a whole that anyone could own it 100%, make a ton of money doing it and still not generate growth for shareholders at this point. Oh, wait, that’s exactly what Harley has done in the last decade.
Ten years ago, I recommended this stock to subscribers of my newsletter service, thankfully making money because of regularly taking out old positions at the end of the year. But what about investors who held on? The company has paid out a great dividend over that time, but is flat on a per share basis ahead of today’s earnings announcement.
Second quarter financial results
- Global retail motorcycle sales fell 1.9% in the second quarter.
- Retail sales in the U.S. fell 5.2% during the quarter.
- Gross margin rate fell 280 bps to 36.4%.
- Lowered full-year shipments guidance to 264,000 from 269,000.
Harley-Davidson's global motorcycle shipments peaked at almost 350,000 back in 2006, and that year it earned over $1 billion. Since then, the company has struggled to grow sales and profit. Even with the real estate bubble, the company's sales have fluctuated between $4.8 billion and $6.3 billion with the last 12 months coming in just over $6 billion. Here’s how the company did over the lost decade.
2006
- Sales: $6.18 billion.
- Profit: $1.04 billion.
- Book: $11.03.
2011
- Sales: $5.31 billion.
- Profit: $599 million.
- Book: $11.28.
2015
- Sales: $5.99 billion.
- Profit: $752 million.
- Book: $13.85.
The book value also reflects a massive buyback of stock over the decade, seeing the company retire more than 25% (68 million) of its shares. At this point, Harley-Davidson is only going to make you money if you trade it, and right now is not the time to do that.
Harley is good on gas
Oil prices will rise again, right? Yes, and Harley may be able to sell 10% to 20% more bikes in the time that rising oil prices hurt gas engines, but there will be a time when solar will be the standard in the industry, and all gas-powered automakers will be obsolete.
Analysts predict the EPS to rise above $6 by the end of the decade based solely on the aggressive share buybacks. But, what about real wealth creation for the owners? The best you can expect is a $1.20 to $1.40 annual dividend and a decline stock price in bear market conditions, which are coming down the pipe.
Wait for the bear market drop to buy in
Don’t get me wrong, I want to love this stock at this price multiple. I just cannot see a future where Harley doubles in value under its current operational model. Harley has stated that it will bring an all electric bike to market within 5 years, but that’s going to be too late. The best best for the company would be to partner with Tesla or use their tech to develop the future for the hog.
Disclosure: I do not have a position in Harley-Davidson.
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