I cannot see the appeal of taking a chance on Harley-Davidson (HOG) right now. Many have attributed their sales woes to tariffs. It is true that the company has suffered in terms of profits thanks to tariffs. But the company has been ailing for years. Their fourth quarter and full year results demonstrate the problem. Consumer sentiment overall is not in favor of the classic Harley-Davidson motorcycle. They want smaller, more nimble bikes. They also don't want to pay an arm and a leg. To that end, Harley is getting forced to adapt in a way that will alienate its customer base that is still loyal. Furthermore, the company doesn't really seem to be adapting fast enough. If anything, I'd rate it a "hold."
For the year, Harley succeeded in maintaining revenue despite lower overall sales. Total motorcycle-related revenue for 2018 was $4.97 billion vs. $4.92 billion in 2017. They achieved this through higher average prices. This might work over the short term, or if you're scaling down the business and creating a more exclusive, high-end product. It doesn't work if you're a publicly traded enterprise that needs to create big sales and earnings growth to drive your share price. The fourth quarter finally caught up with the tactic. Fourth quarter revenue fell 8.7% to $955.6 million. Motorcycles fell 6.6%, while parts and accessories revenue declined 15%. General merchandise (the smallest piece of motorcycle revenue) declined 18% to $58.4 million. In a bitter moment, Harley's motorcycle business reported an operating loss of $59.5 million vs. a gain of $35.5 million last year. For the full year, the company reported operating income of 422.36 million, a 30.4% decline year over year. The company did note that margins within this segment were affected by restructuring and tariffs in the fourth quarter.
The financing end of HOG remained profitable. Financial services revenue increased 4.6%, while operating income declined 0.6% to $63.3 million.
The full-year decrease in bike shipments of 5.3% is a problem that needs to be addressed before this stock can be considered a worthwhile endeavor. Frankly, I'm very concerned that they won't be able to fix the problem any time soon. For the full year, Harley reported GAAP earnings of $3.19. That's a 5.6% increase year over year. Without restructuring costs, those earnings would have been $3.78. Fourth quarter earnings were $0.00 on a GAAP basis. Without the inclusion of restructuring and tariffs, earnings would have been $0.17 per share. Ignoring the costs of restructuring and tariffs, the year's earnings are a good jolt -- reaching levels not seen since 2016. I'm just afraid that the consistent fallout in sales is going to make consistent earnings growth a difficult thing to achieve.
If sales were strong, I'd be empathetic. But over the past few years, Harley demand has been plain old weak. The company has suffered stagnating sales revenue for quite some time. Because of this, I find it difficult to blame the bike maker's woes on the tariff wars that have only been happening for two years. In the short term, they've affected the company's profits. But the sales problems are not the result of tariffs. Their products have fallen out of style. It's a problem even more serious than tariffs.
In the constant effort to revitalize the name, Harley's CEO did warn that 2019 probably won't be the year of improvement. Total shipments are expected to be between 217,000 and 222,000 bikes; a decline from 2018's 228,665. The company has talked about new products that will aim toward a wider audience, at a cheaper price. They also have riding initiatives aimed at bringing more riders to the Harley name. While the effort is better than nothing, it's been a long time coming. The initiatives are aimed through 2022. Until we see these new products, and the effects that lower prices have on sales, I don't think it wise to own HOG. They've had years to fix the problem. They're not doing it.
The nice thing here is that the stock is pretty cheap relative to full year earnings results. At 2018 earnings of $3.18, the stock is trading at a multiple of 10.66 at the time of writing. That's the one reason I call it a "hold" instead of a hard sell. The stock is so cheap that it really doesn't have anywhere to go barring a huge loss. I simply don't see any catalysts for HOG stock. A company with a track record of declining sales does not have much reason to go up in price. The company's maneuvers have helped keep earnings present, but there isn't much here that can make them climb exponentially higher.
Debt has risen through the past few years. Now nearing $5 billion in long term debt, the balance sheet is not what it used to be. That's not to say they're in trouble. With $1.2 billion in cash, Harley Davidson is stable. The stock simply lacks potential in 2019 given the consistent sales weakness. Again, I rate it a hold.