Can The King Remain Atop Its Throne?

Marie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As financial panic gripped consumers by the throat, no industry escaped alive. Take the US motorcycle industry, for example. During the crisis, motorcycle sales dropped to levels not seen since the 1990s. Four years later, competition amongst motorcycle manufacturers is heating up as an improving economy bolsters consumer spending. Still, it’s unlikely that the king of American motorcycles, Harley-Davidson (NYSE: HOG), will lose its crown.

Harley is Supreme

Harley-Davidson reigns supreme in the American motorcycle market. It is one of two American motorcycle manufacturers to survive the Great Depression (see below for the second) and has a brand community like none other. Communities exist centered around its bikes. Last, Harley holds nearly 50% of the US motorcycle market and about a third of global market share.

Harley is well-positioned in the US and is gaining market share internationally. However, slow motorcycle growth and a changing customer base are hampering growth.

In the past, Harley’s image was directly correlated to the devoted, young, hard-core, rebels that lived to ride. But the rebels of yesterday have aged, changing Harley’s base demographic. In 1987 half of Harley riders were under the age of 35. Today, the average Harley customer is a white, upper-class, 47-year-old man that rides as a hobby. Problematic? Not really.

According to Harley’s 2011, 2012, and 2013 10-Q financial statements, since Q3 2011 Harley averaged quarterly motorcycle sales growth of 6.44%, an EBITDA growth rate of 17.65% and a net income growth rate of 14.72%. And, at a stock price of $55.96, the stock has gained 454.06% since its low of $10.10 in 2009. While the new demographic of riders may or may not be driving new growth – it surely isn't hurting it.

<img alt="" src="http://g.fool.com/editorial/images/58194/hog_large.png" />

Harley still has room to ride. Harley needs to focus on its core competency, manufacturing heavy-displacement bikes, and continue diversifying its customer base. African Americans, Hispanics, women, and young adults now comprise nearly 30% of all new, domestic, Harley bike sales. And selling new bikes to these groups creates additional opportunity to cross-sell accessories like clothing to as well.

What’s more, Harley’s international expansion is now a key revenue driver. International sales account for 35% of consolidated sales, up 16% since 2005.

Though it’s still on top, Harley’s main competitor, Honda (NYSE: HMC), and motorcycle-manufacturing underdog, Polaris Industries (NYSE: PII), are doing quite well in their own rights.

Competition

Since 1959, Honda reigned as the world's largest motorcycle manufacturer and the second-largest motorcycle manufacturer in the US. However, right now Honda has a profit problem. The Bank of Japan is driving down the value of the yen against the dollar with its $1.4 trillion bond purchasing program, which drove rates down to .80% for Japan’s 10-year bond. The plan is sending investors out of Japanese bonds priced in Yen and into higher-yielding investments. And it’s hurting Honda’s bottom line.

Despite a 2.8% increase in unit sales, currency translation effects decreased revenue from motorcycle sales by 0.7% from the previous year. And, despite increased cost reductions, operating income totaled ¥110.2 billion (USD 1.1 billion), a decrease of 22.7% from a year prior.

Shinzo Abe, Prime Minister of Japan, will continue to instruct the BOJ to devalue the yen against foreign currencies, like the US dollar, until he believes the Japanese economy has recovered. So, for the near-term and despite motorcycle sales growth, Honda’s bottom line will continue to struggle. Thus, I believe it unwise to hold shares of Honda stock until the interest rate situation improves.

Harley’s lesser-known competitor, Polaris, is the recreational-vehicle industry’s heavy-hitter. Polaris is the market leader in off-road vehicles and snowmobiles. But, despite the success of its other divisions, Polaris’ motorcycle-manufacturing segment has performed weak as of late.

Sales of the On-Road Vehicles division decreased 3% from Q1 2012 to $62.8 million. The On-Road Vehicles division manufactures Indian and Victory motorcycles. Polaris purchased Indian Motorcycles, the other American motorcycle company to survive the Great Depression, in 2011 and plans to launch a range of new Indian bike models later this year. Polaris created Victory Motorcycles in 1998 to compete directly with Harley-Davidson’s heavyweight cruisers.

Overall, North American heavyweight cruiser and touring motorcycle retail sales decreased about 10% from Q1 2012 to Q1 2013. The Motorcycle Industry Council stated that the drop in sales was caused by unseasonably cold and rainy weather at the beginning of the riding season. Polaris’ subsidiary, Victory Motorcycles, also saw sales decline in Q1 2013. However, the decline wasn’t as significant as the industry’s because of Polaris’ continued efforts to gain market share.

Still the king

The fight to dethrone Harley-Davidson is heating up quickly. In North America, Honda motorcycle sales increased 25% in 2013. And Polaris is introducing a new line of Indian bikes expected to take some share. But, it’s unlikely that the competition will overtake Harley as Harley continues to expand its brand community to new demographics, like Hispanics and women, and as sales of Harley-Davidson bikes flourish in developing markets, like Brazil and India.

If you own shares of Harley-Davidson stock, stay the course. But here are two warning signs to watch for:

  1. Eye the USD-JPY exchange rate, a strengthening dollar hurts Honda’s profits but helps Harley as it reduces Harley’s international import costs.
  2. Watch Polaris to launch its new line of Indian bikes. Strong sales may indicate a revival for the second-oldest American motorcycle manufacturer and increase Polaris’ market share, at the expense of Harley.

At the end of the day, however, the HOG remains in first place in the US motorcycle market. Long live the king.


This article was written by Santiago Rodriguez and edited by Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle. Neither has a position in any stocks mentioned. Marie Palumbo has no position in any stocks mentioned. The Motley Fool recommends Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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