Stock Strategist

Harley's Commitment to Wide Moat a Plus for Investors

Jaime M. Katz, CFA

Despite the heightened competition resulting from a foreign exchange differential that has benefited its overseas peers, we think  Harley-Davidson (HOG) is strategically positioned to regain share, supporting its brand intangible asset. Paring back shipments to avoid discounting in the near term, which could weigh on the brand's aspirational perception, is the optimal way to ensure that supply and demand match, and it should protect market share over the long term. We deem recent market share losses as temporary and competitive discounting based on foreign exchange rates unsustainable. More concerning to us is the threat from Polaris' (PII) Indian brand, which could grab meaningful market share over time.

We expect faster growth from Harley's focus on domestic outreach and penetration of international markets, which are key to market share gains and higher unit sales, helping close the gap from baby boomers aging out of the customer base. When headwinds dissipate over the next few years, we think Harley's top position in the U.S. heavyweight motorcycle market will be apparent and the tilt to consumer-led product development will support our demand forecast. Average unit growth of 3% and price increases of 2% over the next decade should lead to normalized EBIT margins that are higher than forecast 2016 levels, expanding 230 basis points to 19.2% over the next decade, helped primarily by the leverage of selling, general, and administrative expenses. Rising operating profitability will improve returns on invested capital, which we expect to rise to more than 26% over the next five years.

Jaime M. Katz, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.