Harley Davidson (HOG) was up less than 1% to $38.24 as of 1:40 p.m. ET after reporting third quarter results. I'll give credit where credit is due. Management did a phenomenal job streamlining the business to create value. The problem is they've done nothing to stop the continued falling sales of its time honored motorcycles. I've written about Harley before, and I don't think it's a wise investment at this time. The very low valuation and big dividend might be tempting, but it's clear that Harley isn't adapting fast enough to changing consumer preferences to smaller, more nimble bikes. The company is largely making money by charging more for its bikes. I do not view that as a sustainable strategy over the long term. If things don't change soon, the stock faces continued pressure.
The revenue growth is great, but can't last.
The company reported revenue growth of 16.8% in the third quarter to $1.12 billion. Motorcycle revenue increased 28.4% to $821.6 million; while parts and general merchandising actually declined. The company's financial services business is also doing well thanks to rising rates. Unfortunately, the nice earnings don't make up for a deteriorating sales situation.
The biggest problem by far remains the U.S. market. As Harley tries to expand overseas, its domestic territory is falling apart. The company reported a 13.3% drop in their home market, while total international sales increased 2.6%. The disparity in sales between the U.S. and overseas brought total worldwide sales down 7.8% in the third quarter. For the full year, sales are down 5.9%. The trend sounds unlikely to change in the near term. The company warned of a tough market in 2019, and asked for patience as they attempt to target a younger consumer base.
To counter the trend, Harley has been driving up the average revenue per motorcycle. This has happened by selling more of their upper end bikes, as well as general increases in prices. As total unit sales decline, you can't keep raising prices on your bikes in order to make up the difference. I don't like the strategy; as it negates the actually problem. They've been dealing with falling sales for quite some time now; and I think you can only drive transaction prices so much before it starts to have negative impacts.
The company has cited low used Harley prices as a cause of their sales issues. While it does seem true that prices for used Harley's have been low, it feels like a cop out to me. When you look at a broader picture, Harley has been suffering for quite some time in terms of sales. Revenues peaked in 2014 and have stagnated ever since. Yes, they've righted the ship lately through higher transaction prices, but that's not a good solution. They have to sell more bikes or this stock will falter.
It's a shame in a way, as this is a company that really shouldn't be public. The idea of a craftsman name like Harley Davidson having to worry about volumes and unbridled growth isn't really what the company was all about when it began. It was supposed to be about making quality products for whoever wants them. I'm not even a motorcycle kind of guy; but I understand the mystique of it all. Shareholder expectations are not supposed to be part of that equation.
Alas, Harley is in fact public. They are expected to produce corporate results; and they're not currently doing that. In fact, the need to satisfy the stock market is forcing them to branch out into what they never wanted to be. In order to target the riding interests of the populace, Harley is working to bring out new models that cater to those seeking smaller, more nimble machines. With new "Street bikes" and on-road/off-road models on the way that will target competitors like BMW and Ducati, Harley hopes to target the market that's been stealing away its customers. I certainly like the decision, but it feels a bit late. The two models most likely to target this market segment aren't expected until 2020. That certainly feeds the narrative that 2019 might be rough. There's also been chatter over an electric bike, but that sounds like it would have a limited customer base. Bikers like the sound of an engine.
Since the plans to provide a jolt to sales all seem distant, I don't feel good about the stock right now. Yes, it is trading at a very low valuation. Yes, it has a high dividend yield of just under 4%; but there are reasons for that. Aside from higher prices on their bikes, where are the catalysts for growth? Right now they're facing double digit percentage rate declines in the number of bikes they're selling. Let's not forget that 2017 was a very poor year for the company. Last's year's net income of $521.76 million was the weakest in Harley's recent history. Their big gains on revenue and profit for the third quarter are relative to some weak contrast in Q3'17.
I've seen some price targets around $43. I do think it's possible to see a rally to such a price; but only because the valuation is so low. Aside from that, I see more downside for the stock. As sad as it is, their products appeal to a dying generation. The very fabric of what made Harley Davidson the charming rebel, is exactly what has held it back. Tastes in motorcycles have changed, and HOG hasn't worked fast enough to keep up.