Analyst Note| Jaime M. Katz, CFA |
Wide-moat Harley-Davidson reported strong first-quarter profitability, with motorcycle operating margins clocking in at 18.5%, significantly higher than the 8% we expected and the 10.5% at consensus (Visible Alpha). While motorcycle-related sales were around our projection, at $1.2 billion, consolidated expenses improved handily, with the gross margin expanding roughly 400 basis points (to 34%) and selling, general, and administrative costs declining 565 basis points, to 15.7% (a level last seen in first-quarter 2014). Additionally, financial services benefited from the release of $102 million in reserves, accounting for about $0.65 in EPS, as 30-day delinquency and loss experience during the quarter remained extremely low (2.1% and 1.5%, respectively). We plan to raise our $34 fair value estimate by a high-single-digit clip in response to recent outperformance but view shares as overvalued.