Harley-Davidson (NYSE:HOG) is a manufacturer of heavyweight (651+ cc) cruiser and touring motorcycles. The company commands a 50% share in heavyweight motorcycle sales in the U.S. After the U.S., the most significant markets are Europe and Japan. Harley-Davidson has a loyal brand following and engages its consumers through various company-sponsored events and clubs such as the Harley Owners Group that has over 1 million members. Its competitors include Polaris Industries (NYSE:PII), which manufactures the Victory and Indian range of cruiser and touring motorcycles in the U.S., as well as with larger volume motorcycle manufacturers such as Honda (NYSE:HMC), Yamaha (OTCPK:YAMHF), Suzuki (OTCPK:SZKMF), Kawasaki and BMW.
Harley-Davidson also has a financial services division called Harley-Davidson Financial Services (HDFS) that provides retail loans to customers to buy new and used motorcycles and wholesale loans to dealers to help them finance their operations. HDFS also acts as an agent to provide motorcycle-related insurance to customers.
Launch of Coverage on Harley-Davidson: $41.50 price estimate
We launch coverage on Harley-Davidson with a near $41.50 price estimate for the company’s stock, which is around 10% below its current trading price.
We have broken down our analysis of Harley-Davidson along the following divisions:
- U.S. Motorcycles
- Financial Services
- Parts, Accessories, Merchandise and Other
- Rest of World Motorcycles
- Europe Motorcycles
Demographic Trends and Marketing Strategy
Harley-Davidson closely monitors the demographic trends of its consumer base. The company defines its core U.S. motorcycle rider as Caucasian males over the age of 35. This is the most passionate and loyal group of Harley-Davidson riders. In the past few years, the median age of a Harley rider has risen from 44 to 49 reflecting the influence of the Baby Boomer generation.
The company is now implementing a "multi-generational and multi-cultural marketing strategy" as it looks to increase sales to non-core customers (women, young adults, and ethnically diverse adults) without alienating its core consumer base. The ability to market traditional cruisers and touring motorcycles to Gen Y consumers (who tend to prefer more modern motorcycles such as sports bikes) will be a crucial test for Harley-Davidson going forward.
(Chart created by using Trefis' app)
Harley-Davidson’s international sales have increased over the past few years. In 2006, close to 80% of sales were made in the U.S., though in 2010 this figure declined to 60%. We believe there is significant opportunity for Harley-Davidson to increase its sales in foreign markets.
In Europe, cruiser and touring motorcycles comprise just about 30% of overall heavyweight motorcycle sales compared to over 80% in the U.S. If marketed correctly, Harley-Davidson could help increase the share of cruiser and touring motorcycles in the European region.
The company also has untapped potential in emerging markets, which are witnessing rapid growth in disposable income and rising demand for luxury and western brands. We believe that heavyweight motorcycle sales in China can easily overtake Japan just as luxury automobile sales in China have overtaken Japan in the past years. Though Japan is Harley’s third largest market, China’s demand for luxury motorcycles is increasing.
While there is huge growth in these markets, emerging markets present some special challenges such as regulatory hurdles, varying emission standards and noise limitations in certain markets that Harley would need to cater to in order to have a meaningful presence.
Disclosure: No position