Harley-Davidson Earnings: Hardwire Initiatives Deliver Stellar Profits Despite Macro Concerns

Wide-moat Harley-Davidson HOG printed impressive sales and profit margins at its motor company segment in its first quarter, benefiting from efforts to refocus on high return products as well as sell in to its 120th anniversary year. Motor company sales rose 21%, with volume contributing 12% growth and price adding 8% upside (net mix and currency accounted for the balance), which helped the segment deliver a 21.6% operating margin—a whopping 470-basis-point expansion. However, two factors temper our excitement. For one, the first quarter should represent the peak operating margin for the motor company segment in 2023, with the metric declining over the rest of the year. The second factor is Harley’s continued overall share losses in the motorcycle market (North American retail sales declined 17%), with Harley representing less than 40% of market share in the first quarter as consumers continue to shift away from heavy bikes. While Harley still represents above 70% market share in touring and cruising industries, such bikes represent a lower portion of the total market, signaling a secular shift in preferences.

We don’t plan to materially alter our $48.50 fair value estimate for Harley and view shares as undervalued. Shares have traded off 11% year to date (through April 26) on macroeconomic uncertainty and concerns around consumer spending on durable goods, but we think investors have discounted the magnitude of profit change that could persist. The firm’s full-year guidance for motor company sales growth of 4%-7% and an operating margin of 14.1%-14.6% are in line with our prior 4.4% and 14.6% estimates, respectively, and imply a midteens average motorcycle operating margin over the next two quarters. Longer term, we don’t expect to alter our outlook that includes low-single-digit sales growth and midteens motor company operating margins given the gains from Hardwire improvements could be offset by profit pressure from rising mix of lightweight units.