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Harley-Davidson Inc. HOG2 S
October 24, 2016 - 11:04am EST by
ci230
2016 2017
Price: 56.61 EPS 3.897 4.201
Shares Out. (in M): 179 P/E 14.6 13.5
Market Cap (in $M): 10,107 P/FCF 9.2 10.2
Net Debt (in $M): 6,131 EBIT 1,070 1,125
TEV (in $M): 16,250 TEV/EBIT 15.3 14.5
Borrow Cost: General Collateral

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Description

THE ONLY WAY HARLEY-DAVIDSON WILL MEET ITS Q4 GUIDANCE IS BY STUFFING THEIR INTERNATIONAL CHANNEL TO RECORD INVENTORY
LEVELS, AS DOMESTIC SHIPMENTS WILL LIKELY FALL (31%) VS (19%) CONSENSUS, WE BELIEVE. THE STREET IS MISMODELING THIS DYNAMIC.
 
Note, I don't need to get credit for this idea, as mrmgr submitted <6 months ago, but I thought this was differentiated enough to deserve its own post, and I don't know how to put images into a comment.  Hence the "HOG2" ticker.
 
Summary:
 
HOG has committed to its Q4 shipment guidance of 44,200 - 49,200 total bikes AND to keeping US inventories flat y/y. This is on the heels of US
retail sales declines of (0.5%), (5.2%), and (7.1%) in Q1-Q3. In a follow-up call with Citi, the CFO also stated that retail sales need not be as high
as 5% to “make the numbers work.” Assuming an optimistic range of 0% to +5% US retail sales growth leads to US shipment growth of (31%) to
(26%) [19,920-21,222 bikes] versus consensus of (19%).
 
For them to still meet shipment guidance, they need to have international shipment growth of +25% to +19%, or a 23-30pt acceleration from Q3.
International shipments would constitute a 52%-55% mix of shipments, versus YTD and historical (since 2012) averages of 37% mix.
 
Assuming analysts’ consensus figure for international sales growth of +4.7%, this means international inventories would be up +1,000 to +2,300
bikes y/y, or $16-37 MM. Although this may not seem like much in light of 16 planned dealer openings internationally (concentrated in
Indonesia, a previously failed country), we contend that wholesale sales resulting from a one-time large dealership addition is not indicative of
the health of the Harley Davidson company. Instead, the focus should be on retail sales.
 
We believe the 2017 narrative will return to a focus on the recent secular declines in HOG’s end market demand, as evinced by retail sales
declines, analyst estimates will need to come down for next year, and HOG will lose its current 14x P/E multiple. Additionally, the company’s
actions corroborate this theory, as they just announced 300 job cuts in Q4 2016.
 
More information:
 
 
 
 
HOG is secularly challenged as their core customer base (white male baby boomers) ages out and demographic trends start going against them.
They have admitted as much on their website, although they mention it as an “opportunity” among “Young Adults, Caucasian Women, African-
Americans, and Hispanics”:
 
 
 
 
 
 
You can see this sharp deceleration in their growth trends:
 
 
 
 
Domestic sales have accelerated to the downside despite lapping easier Y/Y compares. Bulls have gotten excited about the company’s
disclosure that sales trends turned positive in September, suggesting the benefit of the new “Milwaukee Eight” engine launch is flowing through
to retail sales, and emboldening hope this could lead to a sustained positive inflection. Indeed, the company disclosed that September sales in
the US were up +5% after “slightly worse than -9%” in the first two months.
 
They are focusing attention on the introduction of the new engine, saying they saw double-digit increases in Touring sales (which is where the
new engine appears), and took 3.2pp of market share. However, they deflected attention away from the easier Y/Y compares in September
2015 vs July/August 2015. On the aforementioned Citi follow-up call, the CFO clarified that in 2015 they saw, “a slight increase in July, a modest
decrease in August, and a moderate decrease in September.” Please parse the difference between slight/modest/moderate for me.
Additionally, the company called out significant pressure in oil-exposed reasons such as Texas and Oklahoma, which was echoed by the auto
dealers (namely GPI), and we see no reason for that to abate in the near-term.
 
CONCLUSION: We think recent enthusiasm over the September +5% data point will be tempered when we get October channel checks (first
week of November). Some of this +5% is undoubtedly people who have been waiting for the new models for months and is a one-time boost
and likely pull-forward of demand. When the company puts up (26%)-(31%) US shipment declines in Q4, and only hits the low end of their
guidance by growing international shipments +25% (and parking the inventory in their channel), investors will return to focus on the underlying
weak growth in HOG’s end markets.
 
 
 
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • October channel checks (due out first week of November)
  • Q4 earnings
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