Harley-Davidson (HOG)

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See all 5 Bulls Reasons Bulls: Reasons To Buy Better mileage than a hybrid, but makes you look cool 100% agree Better mileage than a hybrid, but makes you look cool As gas approaches $4 a gallon, are consumers going to switch to two wheels to save money? It would seem early results are... yes. The questions was posed to an Illinois Harley Dealer recently. Shad Zimbro, co-owner of Black Diamond Harley Davidson (HOG) in Marion,... read more View or Edit Reason 2 votes 100% agree HOG preserves prices and premium image during US economic downturn 100% agree HOG preserves prices and premium image during US economic downturn While Harley Davidson's competitors in the US motorcycle market have aggressively cut prices in order to prop-up their sales, HOG has instead cut their production and left their prices unchanged. As a result, Harley has been losing market share over the first six months... read more View or Edit Reason 1 votes 100% agree Success internationally could fuel growth 100% agree Success internationally could fuel growth International growth opportunities still afford the company room to expand and grow its bottom line over the long-term. In India, HOG has requested a reduction of the current tariffs to 10% and the ability to establish dealerships in the country, they got 1/2 of what they... read more View or Edit Reason 1 votes 100% agree See all 4 Bears Reasons Bears: Reasons To Sell Slow growth due to saturated US market 0% agree Slow growth due to saturated US market With almost half of the US market, the company has saturated its largest and most important region, so domestic growth should slow. View or Edit Reason 0 votes 0% agree Daddy's getting too old for a Harley 0% agree Daddy's getting too old for a Harley The company’s “growth years” are coming to an end due to the retirement of the baby boomers, who are now past Harley buying age. View or Edit Reason 0 votes 0% agree Not well positioned for international growth 0% agree Not well positioned for international growth International growth will be a major challenge given that the brand is not as well established overseas. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Reason to sell, large portion of previous sales were Harley financed. Bad times, mean defaults [Dismiss] [Done] I was hoping to find rider demographics here as well. Of the sales figures, what percentage men o... more [Dismiss] [Done] Excellent outline of HOG's business. Two question come to mind: First, has the housing slowdown a... more [Dismiss] [Done] See All Suggestions

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With half the US market and a third of the global one, Harley-Davidson is the largest manufacturer of heavyweight motorcycles in the world, marketing products under the Harley-Davidson and Buell brands. As a luxury good, Harley competes primarily on design and quality, rather than price, which keeps margins high. In 2007, the firm generated $5.73 billion in revenue, a 1.3% decline from 2006. Economic conditions in the U.S. significantly affect the firm's performance from year to year.

Harley is arguably the only company whose customers have been known to regularly don its apparel as well as tattoo its trademark on their bodies. Harley's customers tend to be fiercely loyal to the brand, which has helped to drive consistent growth over the past 20 years while making the company the premier name in its industry. This loyalty will be crucial to the company's success going forward, and Harley will depend upon duplicating this success internationally to fuel growth.

[edit] History

With the first Harley (or, as a Harley bike is often known, “Hog”) produced in 1903, the company has a storied history extending over a century. In just a few decades, the company emerged as the largest motorcycle manufacturer in the world, before stumbling like most companies through the Depression. Harley nonetheless survived, and soon supplied products to the U.S. Army during World War II. Harley-Davidson was sold to investors for $80 million in 1981, before it was taken public in 1986. It has since enjoyed a period of tremendous growth, achieving annualized gains of over 30% for investors since its IPO. Through the long history of the company, the Harley-Davidson brand name has been extraordinarily well-recognized within the industry.

As a result of poor economic conditions related to the subprime lending woes, Harley Davidson saw a 1.3% decline in revenue and a 4.3% decline in earnings in 2007. In preparation for the affects of a slowing American economy, the firm's largest market, Harley cut production and shipment of its motorcycles in the 3rd and 4th quarters of 2007. International sales, however, grew by double digit percentage points, with motorcycle sales up 13.7% for 2007.

On the whole, the heavyweight motorcycle market in the U.S., Harley's #1 revenue generator, declined 5% in 2007, while Harley sales declined 6.2%.

[edit] Business Drivers

[edit] Motorcycle sales trends

Motorcycle sales account for nearly 80% of the company’s revenue. The company’s products are marketed to a specific group of buyers and are generally considered luxury goods that do not compete on price (average price of a Hog is around $13k). A variety of factors or trends can drive the business.

[edit] Demographics tailwind

The average purchaser of a Harley motorcycle is a married male in his forties with a median household income of $81,700. The vast majority of customers are essentially middle-aged, middle to upper class males. It comes as no surprise, then, that demographic trends, like an aging baby-boomer population, have likely impacted the company’s recent growth and will have an effect on the company going forward. Because the baby-boomer generation was of Harley "buying age" in the past two decades, the company has benefited from a demographic tailwind since going public.

[edit] Rising discretionary income

Because Harley’s products are luxury goods generally purchased as recreational vehicles, the discretionary income (or income available for spending after necessities have been purchased) of the company’s customer base can have a material effect on the company’s sales. The company has arguably succeeded in the United States largely because the per capita discretionary income is substantially higher than in many other countries. Harley-Davidson depends upon this relatively wealthy customer base to drive sales of its motorcycles.

[edit] Immunity to rising oil prices

HOG revenues are not highly dependent upon oil prices. Ironically, although Harleys are considerably more fuel efficient than cars or light trucks, there is little evidence that US drivers are substituting motorcycles for other kinds of vehicles. Harleys continue to be largely recreational vehicles not typically used as a primary method of transport.

[edit] Product Quality and Culture

Harley devotees normally choose to purchase a Hog because of trusted product quality and the classic style of the motorcycle. Harley-Davidson enjoys the benefit of a culture having been formed around its product, which has proven more of a long-lasting advantage than a fad or trend. The company believes that one of its strongest assets is its Harley Owners Group (H.O.G.), which boasts over one million members worldwide. Customers tend to be fiercely loyal to the brand, and psychological switching costs are high for Harley owners. This is crucial to the success of the company, which depends upon strong consumer loyalty to drive revenue and demand for its motorcycles.

Furthermore, nearly 20% of the company’s sales are derived from non-motorcycle, product sales, including parts and accessories (15.3% of sales), which can include replacement motorcycle parts and cosmetic accessories, and merchandise (4.6% of sales), which can range from clothing to collectibles. The company’s customer culture helps drive this revenue segment, since many customers fully immerse themselves in the Harley owner culture by purchasing accessories and merchandise.

[edit] Strong international growth

While around 80% of the company’s sales still occur in the United States, its international segments are growing quickly, and the company is pursuing opportunities for gaining market share abroad. This can prove important to the company as market share has begun to stabilize in the US due to saturation of this market. International sales grew by double digit percentage points in 2007, with motorcycle sales up 13.7%. Sales grew most rapidly in Europe.

In July 2008, HOG announced plans to acquire MV Augusta, a premier Italian sport motorcycle producer, for $109 million.^[2] This acquisition is important because it will give Harley-Davidson greater access to the competitive European motorcycle market, while at the same time increasing the company's exposure to younger buyers who have little interest in classically styled heavyweight motorcycles.

The company maintains distribution capabilities in Europe, Asia/Pacific, Latin America, and Canada. And recently, the company has begun to sell its products in China – a large, though potentially risky, market for the company. The Chinese per capita income is significantly lower than the United States’ and the level of discretionary income--along with the number of people in China who have discretionary income--is substantially smaller but growing. However, this may be offset by the rate of growth of the Chinese economy, and the sheer volume of potential customers. Other challenges of operating abroad include the fact that Harley’s brand name is less well-recognized outside of the United States.

[edit] Harley-Davidson Financial Services

HDFS provides financing for motorcycle buyers and the company’s independent distributors and dealers. About 11% of the company’s operating profit comes from HDFS. Financing activities are not recognized as revenue, but rather as a line item on the company’s financial statements.

[edit] Interest Rates exposure

The high-end recreational vehicle industry is cyclical in nature, so high interest rates may slightly hamper sales since Harley’s customers often finance their purchases with a loan. High interest rates typically hamper consumer spending on goods like recreational vehicles, which are not necessities. However, the company has been highly successful in keeping up demand during periods of high interest rates and economic recessions. Furthermore, interest rates can more dramatically affect HDFS’ income, which depends on the interest rates paid on the loans issued to customers.

[edit] Steel Prices sensitivity

Around 60% of Harley-Davidson’s cost of goods sold is hot-rolled coiled steel, exposing the company to the risk of input price fluctuations. Prices for this major input have risen from a low of $205/ton in 2001 to around $915/ton in July 2008.^[3] Nonetheless, the company passes these increases on to the consumer, as evidenced by HOG's increased gross margins over the previous five years.

[edit] Comparison to Competitors

[edit] Major Competitors

Harley-Davidson maintains a large margin in its dominance in the US Heavyweight Motorcycle market as compared to its major competitors.

However, Harley’s international market share is slightly smaller. For instance, the company has a 38.4% Canadian market share and a 10.2% market share in Europe as of 2006. Notably, both of those markets are substantially smaller than the US market. Nonetheless, Harley has a dominant worldwide market share of 33% in what is a growing industry.

[edit] Operating Metrics

Several operating metrics are useful in understanding the company’s position vis-à-vis its largest competitor. Honda’s figures are for its motorcycle business only.

[edit] Financial Resources

While the company’s competitors, notably Honda Motor Company (HMC) and Suzuki, do not have as dominant a market position, they often have greater financial resources. This is largely because companies like Honda have more diverse product lines (like cars), and are greater in size than Harley-Davidson, a far more specialized company. For example, motorcycle sales at the company’s largest competitor, Honda, hover around 12% of total revenue.

[edit] Difference in Product Lines

Harley-Davidson is the premier manufacturer of heavyweight motorcycles. As compared to lightweight motorcycles, the products typically appeal to very different cross sections of the population, with the lightweight market catering more to younger buyers seeking speed, agility, and affordability in a motorcycle and the heavyweight market to older buyers seeking style, quality, and, sometimes, status. Thus, Harley’s true competitors are other heavyweight manufacturers, though the company competes to some degree with any motorcycle manufacturer.

Furthermore, the company is in the recreational vehicle industry and may compete to some extent with companies offering different product lines to customers with the general intention to buy a recreational vehicle.

[edit] Notes

1. ↑ 2006 HOG Annual Report
2. ↑ http://seekingalpha.com/article/85278-earnings-preview-harley-davidson?source=feed
3. ↑ http://www.steelonthenet.com/prices.html