Harley's Not Riding off into the Sunset Yet
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If a company is going to celebrate its 110th anniversary, doing so in Rome, at a rally with tens of thousands of bikers, and a papal blessing, is a memorable way to do it. This is precisely how Harley-Davidson (NYSE: HOG) decided to celebrate its first 110 years and the event is expected to continue through Labor Day in its headquarter location of Milwaukee, Wisconsin. But is there still reason to celebrate a company that is facing rising competition from both the U.S. and abroad? Let's find out.
Despite Harley's old age, $13 billion in market cap and $5.6 billion in consolidated revenue last year, the company has grown its market share over the past four years. It owns a dominant market share in the 18-to-34 year-old demographic and remains an expanding company, with much of that growth unfolding internationally.
Nonetheless, it is the U.S. and Europe where Harley continues to generate the highest sales. In 2012, those regions accounted for 80% of "total independent dealer retail sales of Harley motorcycles," according to the annual report. And considering that Harley's performance is tied to the economy, it has been weighed down by Europe, particularly Southern Europe. In the U.S., however, the picture is rosier.
In the U.S., where retail sales jumped 4.4% in the second quarter versus the year-ago period, the economy is a tailwind. As the economy grows, so too does Harley's target demographic. Harley targets households with a median income of nearly $90,000. According to its own studies, more than 75% of its customers have been educated beyond high school, and nearly 35% have a college degree.
For an older company it continues to evolve. It's building out an e-commerce website, and has new products in the pipeline. In a matter of weeks, Harley will roll out its model-2014 motorcycles. According to the conference call, Harley is thinking of raising its prices and maintains that it continues to have pricing power despite rising competition in places like India. It expects 2013 gross margins of between 35.2% and 36.2%
On the international front, Harley is focused on growing its presence in emerging markets. For instance, it currently has about 15 dealerships in Brazil, up from less than a dozen a year ago. It expects to add up to 150 international dealerships through 2015. Sales from the international markets represent about 32% of revenue in Harley's motorcycle segment. Its capex for 2013 should be around $220 million.
India is a growth engine
Incidentally, Brazil has been weighing on performance over at Harley rival Honda Motor (NYSE: HMC), one of the biggest motorcycle companies in the world. In 2013, Honda's "other regions" category for motorcycle sales, in which Brazil is a key player, declined 15% versus 2012 levels. What's really weighing on performance has been tighter lending standards in Brazil.
The weakness in Brazil offset the strength that Honda is experiencing in India, where demand for motorcycles is growing as commuters increasingly opt to use motorcycles as their mode of transportation to get to work. Honda just began production at its third facility in India and has plans to increase its presence further amid demand that's "growing rapidly." For 2014, Honda expects motorcycle unit sales to climb 12%.
As for Harley, keep in mind that it is in the midst of a restructuring, and has $5.1 billion in debt on its balance sheet. The company has $1.4 billion in cash and marketable securities as of the end of the second quarter. In 2012, it paid $141.7 million in dividends and spent $311.6 million on share buybacks. Its growth prospects are solid. As long as the economy continues to hum along, I believe Harley will expand.
A new deputy in town
Polaris Industries (NYSE: PII) may be known for its snowmobiles, but the company revved up when it acquired the legendary Indian Motorcycle brand a couple of years ago This gave life to the company's minuscule motorcycle business, which operated under the brand Victory and represented only a fraction of the company's $3.2 billion in sales last year. Indian is a historic brand in the U.S. and dates back even further than Harley (Indian was founded in 1901). Nonetheless, it has struggled with profitability, and Polaris believes it can turn things around.
Now Polaris is ready to introduce its family of Indian motorcycles. Earlier this month, Polaris unveiled a trio of new Indian Chief motorcycle models, which will debut in dealerships in September (coinciding with Harley's debut of its 2014 motorcycle line). Polaris still has only a small stake in the motorcycle market, but projects the Indian/Victory combination can generate $750 million in annual sales and take a 10% market share by 2015.
Harley is still the sheriff in town, but there are some deputies waiting in the wings. Polaris is a company to watch, and with Honda you get the diversification of its automobile business. But Harley has withstood the test of time and has risen to the competition. Of the three, I prefer Harley-Davidson, but would keep a close eye on the rivals.
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Gerelyn Terzo 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!