Harley-Davidson (HOG) shareholders have been caught in an irritating game of trade between the United States and Europe. Indeed the motorcycle company has been getting some attention lately as it is caught in the midst of trade disputes between the United States and Europe.
The issue is causing such a dilemma for Harleys in regard to its ability to export bikes to the European market, that it is likely to move some production overseas to avoid the costs. While this certainly isn't helping matters, the current trade situation cannot be blamed for Harley-Davidson's overall situation. The motorcycle legend has been suffering for years from sales issues, and general fallout in competition toward competitors. The issues, and financial shifts facing the company mean that investors should have been bearish on this one long before trade disputes.
The sales tell a bad story
When looking at this stock, you have to consider more than just the current drama. The company has been plagued by sales declines for quite some time. Because of these declines, it's easy to see that any revenue growth (of mention is the first quarter of 2018, which will be covered below) is stemming from higher sales prices, rather than meaningful unit growth. In the fourth quarter of 2017, total worldwide retail sales fell 9.6% year over year to 42,142 motorcycles. For the full year, Harley suffered sales declines of 6.7%.
Perhaps most disturbing is that the bulk of those declines stemmed from the American market. U.S. sales declined 8.5% in 2017, while international sales fell 3.9%. The only market that had sales growth in the fourth quarter of last year was Canada, with 4.9%.
Trends didn't change in the first quarter of 2018. Worldwide sales were down 7.2%, while the United States market took a particularly hard hit of 12% to its total sales. Internationally, sales did increase by a marginal 0.2%, but it certainly wasn't enough to create an overall growth story.
Though the company is pushing for a higher percentage of its sales to be diversified overseas, the United State remains an important piece of their cash flow to achieve that end. Their total market share of the home market declined 0.9 points to 50.4% of motorcycles sold. Further, if United States sales continue to fall, they'll cannibalize the gains made elsewhere. Though let's be honest, 0.2% international growth isn't exactly Christmas morning.
Despite the weakening sales, Harley-Davidson is putting up profitable numbers. I have questions about how long that trend can last in this climate.
Long term revenue potential doesn't add up
While Harley has managed earnings that have kept the stock viable, the big picture fundamentals have been stagnant. In the 2017, Harley created full year revenues of $5.65 billion. That's a 5.82% decrease from 2016. As a whole, revenue hasn't really grown since 2014. As the company has dealt with this stagnating revenue stream, gross income has suffered as cost cuts do not keep up with revenue fallout.
In the short term, Harley has changed the trend. The company created revenue growth of 10.7% in the fourth quarter of last year. For the first quarter of this year, it managed revenue growth of 2.7%. With declining overall sales, these revenue increases stemmed from currency exchanges and price increases.
That nice tax cut didn't hurt either. While this move has helped as of late, the façade is starting to crack on net income. Income declined 82.4% in the Q4'17, and 6.2% in Q1'18. The first quarter's income of $174.8 million kept the company profitable, but is inducing diminished value to shareholders. Earnings per share of $1.03 marked a 1.9% decline year over year.
If you look at the five year trend, you can see net income faltering. The only thing that has stemmed earnings from being even worse is the rapid share buybacks that Harley has implemented to strengthen share value. Diluted shares outstanding have gone from 224 million in 2013 to a little over 169 million at the end of this year's first quarter. Without these stock repurchases, I highly doubt Harley's stock would be trading at more than $35, as earnings per share would be down a lot.
How long can Harley-Davidson supplement revenues by increasing prices?
At a certain point, that must start affecting demand in a negative way. They certainly don't want to exacerbate that problem.
Moving forward, it almost seems necessary for Harley to find a cheaper place to manufacture, or they'll be in some serious trouble. At the same time, foreign manufacturing will very likely alienate the American following that made the company what it is. It's a tragically tough problem, and I don't think Harley-Davidson has an easy solution. I see the stock as a bad long term move at this time.
The one positive I see propping it up is the strong dividend. At 3.5%, it's one of the best you can get for the price. But there are underlying reasons that the stock is affordable. Those problems haven't gone away.