Positive Harley-Davidson earnings results and yet stock continues to slide

Harley Davidson [HOG], the famed US motorcycle firm founded in 1903, has released its earnings for the third quarter, beating Wall Street estimates by making 68 cents per share. 

The Wisconsin-based company, which went public in July 1986 for 1.43m shares valued between $9 and $11, currently has a market cap of $6.4bn.

The third and fourth quarters are historically Harley-Davidson’s worst, though the iconic brand faces more existential problems – the baby boomer generation is ageing out of riding, while young, metropolitan and female bike riders favour smaller, lighter and fundamentally cheaper alternatives. Harley says these are in the pipeline. But US motorcycle sales were down 13.3% for the quarter from a year ago. 

Harley reported $1.32bn in revenue and took $0.68 earnings per share (EPS) in the three months up to September, compared with $0.40 a year ago. Competitor Triumph Bancorp’s [TBK] quarterly EPS was $0.51, compared to $0.47 per share a year ago. Other names such as Toyota (TM), Kawasaki (KWHIY) and Honda (HMC) are yet to announce their numbers. 

Analysts expected Harley Davidson to post a profit of $0.53 a share and make a revenue of $1.07bn. 


Difficult year

It’s generally been a difficult year for Harley-Davidson shareholders: the company’s stock was down 3% on Monday, and at $37.20, is underperforming in the market this year. It’s down 26% YTD compared with the S&P 500, which is up 2%.

Following the release of its earnings, the company has been successful in ensuring the business remains upwardly profitable; making $113.9m in the three-month period, a 67% increase from $68.2m in the same period a year earlier. 

Sales slipped 8.7% in the first half of 2018, according to industry analyst Gerrick L. Johnson at BMO Capital Markets, yet the company. reported $1.32bn in revenue in Q3. This is up 15% on the previous year, showing some potential winds of change which might interest investors. 

In the previous earnings result, sales had declined 6.4% on the previous quarter, better than the 12% drop experienced in Q1. Last quarter, Harley sold its fewest bikes (46,490) since the second quarter of 2009, when America was gripped by the financial crash and the company could only shift 35,000. Yet Harley reported a revenue of $1.53bn in the Q2 earnings, beating expectations.

The stock has been in free-fall in the run up to earnings, dropping around 11% since Wednesday. On Tuesday, shares dropped 6.6% following an initial rally given the positive earnings result, after the company said it would be recalling almost 240,000 motorcycles, at a cost of $35m, which will be factored into Q4.  


Opportunity knocks

After a relative over-performance amid somewhat dour circumstances, the motorbike maker is an interesting stock right now, though it continues to be affected by wider politically-driven, mercantile concerns. A tumultuous sequence began when the Trump administration announced steel and aluminium tariffs on Canada, Mexico and the EU at the end of May. 

The EU responded in due course, and Harley-Davidson was hit by the EU countermeasures; the additional EU tariffs on its motorcycles, the company estimated, would cost the company $90 to $100m per year. It will now be shifting some production overseas due to the EU regulatory tariffs, to ensure its motorcycles are accessible to EU customers.

As to be expected, President Trump reacted unfavourably to this, even counterintuitively encouraging a boycott of the all-American biking brand. The tariffs also led the American firm to downgrade their profit guidance for 2018.


Earnings effect

Some of the company’s success in this earnings release has been put down to a 2.6% increase in the company's international sales. Harley also celebrated its 115th anniversary this year, with events in the US and the Czech Republic attracting a combined 260,000 visitors, however worldwide Harley sales are down 7.8%. 

Currently, Goldman Sachs has the stock rated as ‘neutral’, while shares are still down over 20% YTD and expected growth is minimal. And yet, the move to take some production abroad may improve all this; with potentially cheaper overheads and some tariffs circumvented, investors ought to keep an eye on the company and trade relations between the US and its partners.


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