Harley-Davidson Earnings: Motor Profitability Shines While Electric Waits for Del Mar

We expect to lower our $47.50 fair value estimate for wide-moat Harley-Davidson HOG by $1-$2 after incorporating second-quarter performance and an updated full-year outlook into our model. The firm’s second quarter was plagued by a manufacturing halt that led to an 11% decline in shipments, the impact of which was muted by an 8% increase in average selling price. However, operating profitability at the motor segment held up well at 16.2%, down 60 basis points versus last year but 220 basis points higher than in 2021, as the firm continues to focus on curating products with the best returns. The electric segment remains a drag, shipping just 33 units ahead of the third-quarter launch of the Del Mar electric motorcycle, leading to accelerating operating losses in that line. The idiosyncratic issues in the period led Harley to trim its 2023 outlook for motor sales growth to 0%-3% (from 4%-7%), motor operating margins to 14.1%-14.3% (from 14.1%-14.6%), and electric shipments to 600-1,000 (from 750-2,000). We plan to adjust our existing forecast—for 5% motor sales growth, 14.5% motor operating margin, and around 860 electric shipments—to be closer to guidance.

We don’t see any reason to alter our long-term outlook for Harley. We assume 6% average sales growth over the next decade, largely attributable to planned growth in the electric business, which is margin-dilutive at the enterprise level. This is likely to keep our enterprise operating margin estimate in the low teens. In our opinion, Harley has done a tremendous job restoring profitability and brand elevation to the legacy heavyweight business, but that continues to be less relevant to consumers. As evidence, while Harley holds more than two-thirds share of the domestic touring and cruising markets, it maintains just a 35% share of the overall domestic heavyweight market, down significantly from the 50%-plus it used to command.