Harley-Davidson Valued For Near Perfect Execution In 2014

| About: Harley-Davidson, Inc. (HOG)

Harley-Davidson (NYSE:HOG) continues to face the challenge of an aging core market, tough competition, and a challenging economic environment. While I won't re-tread detailed numerical fundamental analysis covered well by contributor Jeroen Jongbloed here, I will touch on some of the numbers for Harley-Davidson. I am continuing my Lynchian approach of initially analyzing companies I know as I did with Big 5 Sporting Goods (NASDAQ:BGFV). I personally own a Harley Davidson Sportster, regularly attend events at two of the major dealerships in San Diego County and recently spent two days at the International Motorcycle Show in Long Beach CA. This is one of the premier motorcycle shows in the country - both because it is part of the touring IMS program each year, and LA is both the largest market for motorcycles in the U.S. and the home of many of the motorcycle companies. Of course, that isn't true for Harley, which still calls Milwaukee home.

Harley-Davidson currently trades near its 52 week high at a P/E multiple of 21.2. According to YCharts, this is almost exactly its average P/E multiple since the current ownership was put in place. As Jongbloed points out, this multiple and many others have Harley fairly to highly valued. I agree, and also feel Harley is priced for nearly perfect execution of many transitional products over the next year. Let's look at these products one by one and discuss the benefits to Harley-Davidson and some of the challenges.

Project Rushmore

Project Rushmore is a technological advancement in the touring bike category. It has already been released in the early 2014 touring bikes. Major improvements to the drive train, fairing and electronic accessories all were incorporated in these models making them significantly better than 2013 and earlier touring bikes. Harley and their dealers are hoping this will drive the touring bike owners and new shoppers to want the 2014 models instead of leftover or used 2013 or older bikes. This is a key market, as many of the touring bike owners also buy accessories and customizing parts, and likely ride with their spouse/partner who will also buy accessories.

However this is not without risk. Most of the touring bikes carry hefty price-tags, and Harley-Davidson has also attempted a 3.5% price increase for 2014. Also, a late-model touring Harley can be expected to last many years and probably 100,000 miles if properly maintained. I am not confident the upgrades will drive many owners nearing retirement to trade up early in the current economic climate. Additionally, Polaris has been competing well with Harley with the Victory line and introduced an all-new Indian line of 3 bikes late in 2013, with a large, separate display at the Long Beach International Motorcycle Show among other promotions. How much Indian cuts into both Harley and Victory sales will bear monitoring as 2014 model year continues.

Street 500cc and 750cc light/middleweight cruisers

In early 2014 Harley-Davidson will begin selling the Street model, the first water-cooled light/middleweight cruiser in its history. Made in Kansas City for the U.S and Canada market and in India for a few international markets, this is a huge gamble on Harley's part. The company is hoping to increase urban market penetration and expansion in the large India motorcycling market. Its other goal is to provide an introductory level motorcycle, especially a small displacement bike for its Rider's Edge course as the discontinued Buell Blast was the only bike meeting the displacement requirements for this course.

This strategy has some positives, but also comes with large risks. First positive is a water-cooled, fuel-injected motorcycle easily meets existing environmental regulations which the old Evolution motor currently in Sportsters has difficulty doing. Also, while considered the "piglet" by some Harley purist, even the 883 Sportster is a large motorcycle for tariff and some insurance purposes and isn't an ideal starter motorcycle despite being labeled as one. The challenges facing Harley are three-fold with the Street introduction: Stiff existing competition from metric bikes, tight margins for small cruisers and that Street sales will likely cut Sportster sales especially in the U.S. market. I intend to closely watch Street and Sportster combined sales to see if there is net growth between the four models, including the higher displacement 1200cc Sportster. Also of note there were NO Street models on display at the International Motorcycle Show, which was a huge opportunity lost.

New and more female riders

Just last Friday, a positive news article on women Harley riders was released by the LA Times. While none of the findings were particularly earth-shattering for those of us with riding spouses and female friends, and echoes how most men feel about riding, it highlights that Harley must grow its riding base to continue being profitable. Old white guys alone won't buy the number of motorcycles Harley makes, even with capacity reductions in the past few years. Getting more women riding their own bikes has been a marketing strategy of Harley-Davidson for the past few years, and this news article seems to be "product placement" by The Motor Company. Whether it's buying a motorcycle, customizing her own bike, or buying "motorclothes" and other accessories, the female demographic is a key growth area for Harley. However, they are facing some of the same challenges here as with the male buyer - many young female riders choose sportbikes or metric cruisers instead of Harleys.

Further analysis of Harley-Davidson Financial Services (or HDFS) and Harley's merchandise sales and licensing also reveals most positives are fully priced into the stock currently. HDFS has interest rate and write-off issues, and merchandise at dealerships is very pricey and could take a downturn as discretionary purchases come under pressure in 2014.

Hunter Orr of Alpha Street Research will announce a downgrade to "sell" December 30th which may or may not be published here. I don't know if that is premature but I think in-depth research before initiating or adding to a position in Harley-Davidson is warranted. The challenges of a changing demographic, stiff competition across their entire model line, and economic headwinds leave little upside at current pricing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.