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Stock Analyst Update

What Harley's Tariff Plan Means for Investors

We're lowering our fair value estimate by a couple of dollars and expect shares to remain volatile short term.

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In response to U.S. tariffs on imported steel and aluminum, the EU has placed tariffs on American-made goods, including  Harley-Davidson (HOG) motorcycles. Harley was already set to see inflated input costs from higher steel and aluminum inputs, noting on its April call that raw material expenses were likely to cost another $15 million to $20 million on top of the already higher prices that the company was experiencing. However, the new Harley tariffs are set to cost an average of another $2,200 per exported unit, hindering potential demand if prices were to pass through. To protect both the demand and the brand (which underlies our wide-moat rating), Harley plans to cover the tariff itself, costing the company an anticipated $30 million-$40 million in 2018 and $90 million-$100 million in 2019. Additionally, Harley is setting a plan to move production of units destined for the EU to international facilities. Currently, the firm can utilize its India and Brazil CKD factories to support demand (with a facility in Thailand expected ahead), but this will likely come with an incremental investment and could take more than a year to complete.

Shipments to Europe (16% of retail) could slow as 2018 progresses and contingency plans develop. Our 2018 forecast includes 227,000 shipments, below Harley’s guidance for 231,000-236,000 units. We have modestly lowered our 2019 shipments from 231,500 units (to 230,600), implying only 1.5% global growth as the company works through shifting its manufacturing. We expect the gross margin to deleverage materially in 2018 and 2019, pushing motorcycle operating margins down to about 11%, a level not seen since the recession. We expect margin expansion could resume in 2020, once overseas manufacturing changes are executed. In light of these updates, we plan to lower our $49 fair value estimate by about $2 and view shares as undervalued. We expect shares could be volatile until we hear a more thorough game plan alongside second-quarter results.

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