Harley-Davidson Is a Value Trap
- By Jonathan Poland
Harley-Davidson Inc. (HOG) is treading water and even an announcement regarding an electric bike isn't going to save shareholder value. The next generation is going to look more for automation and convenience than ownership, which spells trouble for the automotive sector as a whole. An electric bike set to be on the road by 2020 isn't going to help it build a younger network of riders.
Warning! GuruFocus has detected 2 Warning Sign with HOG. Click here to check it out.
The intrinsic value of HOG
Financially, Harley Davidson still generates high returns on equity (23.5%) and has solid gross profit margins (38.3%), but sales are down 10% from a peak in 2014 and it has accumulated more long-term debt, which is currently equal to about 10 times last year's earnings. The company has had to buy back stock just to keep its book value and earnings per share flat.
More importantly, while it may still dominate the U.S. market for heavyweight bikes, the 115-year-old motorcycle manufacturer has stiff competition from both Honda (HMC) and Ducati. Management projects the company will ship 231,000 to 236,000 motorcycles in 2018. This is lower than the 241,498 bikes it shipped last year and the lowest level since 2011. In other words, sales and profits will be down again this year and probably next year as well.
The company has made headlines in recent weeks regarding U.S. tariffs. President Trump's stance on international trade has resulted in the European Union enacting tariffs, which increased the cost of Harley's by over $2,000. Instead of passing it down to dealers, the company has eaten the cost. While this was a good move from a loyalty perspective, the volatility from the government's tariff game may push production overseas in the next couple of years. Earlier this month, Harley-Davidson started winding down production at a plant in Kansas City, putting 200 employees out of work and, at least for the near term, shifted some of the production to a plant in Pennsylvania.
Value Line has a three-to-five-year target price range between $85 and $130. If you blindly follow these targets, the stock looks cheap right now. But the consumer market for motorcycle ownership is not growing. Since 2010, the number of motorcycles registered in the U.S. has risen by less than 4%. It's also highly competitive, so while Harley does have strong brand recognition, its wide economic moat doesn't really matter that much.
The company will likely continue to buy back stock to keep per-share numbers flat as it has to invest capital in new plants and continues to see margins erode. Investors should expect lower price multiples across the board with only the dividend possibly making this stock worth owning. With the stock under $45, 3.5% is a solid yield. But investors looking for capital gains should take a hard pass on the motorcycle manufacturer.
Disclosure: I am not long or short HOG.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Sign with HOG. Click here to check it out.
The intrinsic value of HOG
