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Commentary

Uphill Climb for Harley

We’re planning on lowering our fair value estimate for the motorcycle maker and see few near-term catalysts to drive the stock higher, writes Morningstar’s Jamie Katz.

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As demand waned in the third quarter, wide-moat  Harley-Davidson (HOG) has again adjusted its outlook and embarked on tactical changes in the business to remain competitive over the longer term. While we don't think the brand is impaired, we do think near-term volatility in shipments and share performance is likely to ensue as competitive pressures fail to abate. We will be lowering our $68 fair value estimate 10%-15% in response to lower shipments, weaker operating leverage, and a longer assumed duration of international companies dumping domestically, and we are putting the shares under review. With the shares trading around $52, we view them as undervalued to our most recent fair value estimate, but caution investors that there are few near-term catalysts to drive the share price higher, and at least the next two to three quarters could deliver uncertain results. Despite the initiatives to improve consumer connection, we assume most of the rising spending will occur in 2016 and not offer a benefit to profits until 2017.

With new full-year shipment guidance down to 265,000-270,000 (from 282,000-287,000 at the beginning of the year), little promise is left in rising shipments for the fourth quarter; the new outlook indicates shipments should be flat for the remaining quarter, versus our prior internal fourth-quarter estimate calling for 16% growth. For the full year, this takes year-over-year shipments from rising 2% to falling 2%. The insight the past few quarters have offered us is that not only is brand important, but so is price in certain instances. Recently, it seems that competitive pricing is outweighing rising brand penetration for Harley-Davidson, acting as a drag on retail sales and shipments. 

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