Harley Davidson Isn't A Buy … Yet

Harley Davidson Is Down But Not Out

Harley Davidson (HOG) has been struggling in its core market, the U.S., and that is not likely to change. While sales in the EU are on the rise, sales in the U.S. continue to fall under pressure from competitors and shifting market trends. Names like Polaris (PII), Ducati, BMW, Honda (HMC), and Yamaha (YAMHF) are all gaining share in a market rapidly aging-out. Older riders dominate Harley Davidson's client base and fewer young riders are entering the market each year.

Harley Davidson, even at the entry-level, is a premium bike so not the one new and lower-income riders first turn to. Even so, it was a surprise when Harley Davidson missed the consensus estimates for 4^th quarter earnings. Given the health of the U.S. labor market and consumer sentiment Harley should have posted better results.

The company saw its revenue decline by -8.5% from the last year as its share of the market contracted to near 50%. Still the leader in U.S. sales, at the current pace of decline it won’t be long until its closest competitors close the gap. That’ll leave America’s most iconic motorcycle brand just another manufacturer of bikes in a highly competitive market. Management is fighting back but the question remains. Can they do enough to bring the company back to growth?

Harley Davidson, By The Numbers

Revenue for the fourth quarter was down -8.5% to $874.1 million. This resulted in an adjusted EPS of $0.20, $0.02 shy of consensus, and GAAP EPS of $0.09, also short of consensus. Total shipments of motorcycles fell -7.0% to 40.5 but are expected to stabilize in the coming year. Sales in the U.S. fell by -3.1% , sales in the overseas segment rose by 0.5% but strengths and weaknesses are evident on a region by region basis.

Growth Strategy In Process

Harley's is executing on a strategy that is expected to return the company to growth by 2021. The core is building ridership in both domestic and international markets while trying to adapt to current trends.

One such initiative is the Livewire electric bike project. Livewire is a sharp-looking all-electric vehicle but it comes with a hefty price tag. Starting at $29,000 it will price most new riders out of the market so its impact on sales is limited.

Another is a focus on overseas sales. With total overseas sales on the rise, it makes sense as a driver of growth that could offset or overshadow weaker results in the U.S.

"Our performance in Q4 and the full year was in line with our expectations and indicative of increased business stability driven by the tremendous efforts of our employees and dealers," said Matt Levatich, president and chief executive officer of Harley-Davidson. "In 2019, we took important steps toward returning to significant growth in 2021 – including launching LiveWire, our first electric motorcycle, optimizing our global dealer network and expanding our international footprint,"

The Dividend Is Good But There Are Risks In The Outlook

Harley Davidson pays a substantial dividend despite its struggles with the U.S. motorcycle market. At today’s prices, the stock is yielding over 4.3% and well above the broad market average. At first glance the payout is safe, the payout ratio is about 50%, but the company carries a high load of debt and the outlook for growth is tepid.

The 4th quarter earnings report came with an outlook for 2020 that falls short of consensus. The company is looking for revenue in the range of $4.53 billion to $4.66 billion versus the consensus of $4.66 billion. The added sting is this guidance also opens the door for another year of revenue decline despite management’s quest to return the company to revenue and earnings growth.

The Technical Outlook: Choppy With A Chance Of Bottom

Starting with the daily charts, the technical outlook is choppy to say the least. Sideways action, up and downswings, and range bound are other terms that can be used. Today’s earnings report sent shares down more than -6.0% at the open but did little to change that scenario. Pulling out to the chart of weekly prices that choppy sideways action looks like a bottom is in play that could result in a market reversal.

The risk is if Harly Davidson can reinvigorate U.S. motorcycle ownership and maintain its market share. While the pace of decline in U.S. sales is slowing sales are still in decline and Harley’s market share is still under pressure. Changing the entire market is a monumental task.

Investors looking to take a ride with Harley are urged to use caution with position sizes until price action confirms a reversal and moves above $40. Until then, it looks like firm support is present at the $32 level, so long as it holds the outlook is neutral.