Harley-Davidson Continues To Ride Through Adversity

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

Summary

Harley-Davidson reported first quarter 2016 increase in revenues of 4.6% despite facing ongoing foreign currency headwinds and intense competitive discounting.

The response in international markets to the new lightweight Street bike and the company's investment in attracting new riders has me optimistic about the company's future.

The company gave higher-than-expected guidance for the full year, which shows that marketing initiatives and product development are working.

Harley-Davidson (NYSE:HOG) reported a better-than-expected revenue increase of 4.6% for the 1st quarter in 2015, up to $1.75 billion from $1.67 billion the same quarter of the previous year. In addition to the solid revenue growth, EPS increased 7.1% despite a net income decrease of 7.2%. In my last article on Harley-Davidson, I discussed that I think the company has a loyal customer base that will stick with it through competitive pricing and is developing the right mix of products to succeed in emerging markets. And based on those reasons, I stated that I believe Harley-Davidson is an attractive long-term investment. The article was published on October 23, 2015, and the stock closed at $48.20. Prior to releasing earnings on April 18, 2016, the stock price closed at $46.95, down 2.5% from my last article.

In this article, I will update my analysis on whether the company can create revenue growth going forward, and determine whether there are any obstacles that emerged or gained severity since my last article on Harley-Davidson.

Worldwide shipments were up 4.3% year over year to 83K motorcycles. The increased shipments were driven by the two new soft-tail S models, two refreshed sportsters, and the new Road Glide Ultra. Additionally, the increased shipments came in a quarter where Harley-Davidson is facing a very difficult market. First, as seen in the automobile market, there is intense competitive discounting in the motorcycle market. While it is important for Harley-Davidson to move motorcycles, it's also very important for them to do that without engaging in brand-damaging discounting. Second, declining fuel prices are causing consumers to shift back to larger vehicles instead of fuel efficient modes of transportation. Third, with the strong dollar, the company is facing foreign currency headwinds that knocked off approximately 1% from its revenue growth.

Despite facing these challenges, Harley-Davidson posted a strong quarter. In addition to the five new 2016 models posting strong sales, there were other factors that contributed to the results. These include international growth and marketing investments. International growth was driven by Canada, 16.3% gain; EMEA region, 8.8% gain; and Asia-Pacific region, 6.6% gain. International markets definitely show promise for Harley-Davidson, which credits these increases on the launch of the Street motorcycle in these markets. The lightweight motorcycle, which is the first lightweight motorcycle manufactured by the company since the 1974 Sprint and is easily the lowest priced model in its lineup, is now more attainable than ever before for riders around the world. Management fully expects international retail sales to grow at a faster rate than in the U.S. in the future.

The other factor being linked to the increased shipments are the marketing initiatives taken by the company. The company launched the Live Your Legend integrated marketing campaign in March, which is trying to cultivate the next generation of Harley-Davidson riders. As with a lot of aging companies in today's market, the transition from the baby boomer market to the millennial generation is critical. In addition to the marketing campaign, Harley-Davidson is also investing in the Harley-Davidson Riding Academy to encourage motorcycle ownership. Lastly, in connection with these efforts, Harley-Davidson is also investing heavily in the dealership network. All of these initiatives combined should help Harley-Davidson transition generations.

The foreign currency headwinds should not be a new headline as it is impacting all international companies. A repeated piece of advice I continue to provide to anybody looking to create or maintain an investing portfolio is to look past the foreign currency headwinds. While, I would definitely recommend shifting a portion of one's portfolio to stocks not subject to foreign currency headwinds, such as Rite Aid (NYSE:RAD), Lowe's (NYSE:LOW), Spirit Airlines (NASDAQ:SAVE), and Nordstrom (NYSE:JWN); however, I think it is very important to have portfolio diversity and exposure to different levels of foreign currency impact. If a company's share price is being driven down by foreign currency headwinds, a temporary variable, but has a sustainable business model going forward, the headwinds can help create a better entry point. In Harley-Davidson's case, there are definitely positives and certainly other negatives, which require a deeper analysis of the company's results to determine whether a long-term investment is worthwhile.

Despite the company's challenges, which include increased competitive pricing, foreign currency headwinds, and lower oil prices, I'm extremely encouraged by its investment in the future and the reception the new products are seeing domestically and internationally. I believe the Street model gives Harley-Davidson an attractive option in emerging markets and a trigger for sustainable growth in these markets. Additionally, it is important that Harley-Davidson is keeping the gross margin high to protect the important brand, which at 37.4%, it appears is being accomplished despite the difficult economic environment. Lastly, the company has seen positive market response to the six 2016 model year motorcycles, which is encouraging for its future.

Speaking of new products, the company has not made any changes to the expectation that the Project LiveWire bike will be out before 2020. The current demo phase of the product is geared towards a short commute with an estimated range of 53 miles and a charge time of 3.5 hours, but is currently being modified to expand both of these attributes. While Harley-Davidson's release will likely come behind Zero Motorcycles and Polaris Industries' (NYSE:PII) electric bike models, but as with anything Harley-Davidson produces, it is critical for management to produce a higher quality compared to competitors. I continue to expect the introduction of the electric motorcycle to be the necessary direction of the future market and a key factor for the company's long-term success. And as I've stated many times before, when it comes to introducing a motorcycle to the market, there is no one I trust more than Harley-Davidson.

In addition to the shipment growth, management announced shipment guidance of between 269K and 274K motorcycles in 2016. Of that range, 82,500 to 87,500 motorcycles are expected to be shipped next quarter. This optimistic guidance shows that management's initiatives to increase product and brand awareness, attract new ridership domestically, increase and enhance brand access, and accelerate the cadence and impact of new products is paying off. This is clear when looking at the year-to-date investment levels compared to the prior year - investment in customer-facing markets and investment in product development are both significantly higher.

Taking all of these factors into consideration, I continue to believe Harley-Davidson is a great example of a company to help diversify an investor's portfolio for foreign currency exposure. The company has been beaten up by the market lately, which is consistent with automobile companies, but it has the product mix to be successful going forward. While the company is impacted heavily by the fluctuation in the foreign currency exchange rate, I believe the currency headwinds are a short-term issue that is likely to be cyclical. I believe the company has a loyal customer base that will stick with it through competitive pricing and new products to succeed in emerging markets. Based on these reasons, I continue to believe Harley-Davidson is an attractive long-term investment.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HOG over 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.