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Harley-Davidson, Inc. (HOG): Can The King Remain Atop Its Throne?

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As financial panic gripped consumers by the throat, no industry escaped alive. Take the US motorcycle industry, for example. During the crisis, motorcycle sales dropped to levels not seen since the 1990s. Four years later, competition amongst motorcycle manufacturers is heating up as an improving economy bolsters consumer spending. Still, it’s unlikely that the king of American motorcycles, Harley-Davidson, Inc. (NYSE:HOG), will lose its crown.

Harley is Supreme

Harley-Davidson, Inc. (NYSE:HOG) reigns supreme in the American motorcycle market. It is one of two American motorcycle manufacturers to survive the Great Depression (see below for the second) and has a brand community like none other. Communities exist centered around its bikes. Last, Harley holds nearly 50% of the US motorcycle market and about a third of global market share.

Harley is well-positioned in the US and is gaining market share internationally. However, slow motorcycle growth and a changing customer base are hampering growth.

In the past, Harley’s image was directly correlated to the devoted, young, hard-core, rebels that lived to ride. But the rebels of yesterday have aged, changing Harley’s base demographic. In 1987 half of Harley riders were under the age of 35. Today, the average Harley customer is a white, upper-class, 47-year-old man that rides as a hobby. Problematic? Not really.

According to Harley’s 2011, 2012, and 2013 10-Q financial statements, since Q3 2011 Harley averaged quarterly motorcycle sales growth of 6.44%, an EBITDA growth rate of 17.65% and a net income growth rate of 14.72%. And, at a stock price of $55.96, the stock has gained 454.06% since its low of $10.10 in 2009. While the new demographic of riders may or may not be driving new growth – it surely isn’t hurting it.

Harley still has room to ride. Harley needs to focus on its core competency, manufacturing heavy-displacement bikes, and continue diversifying its customer base. African Americans, Hispanics, women, and young adults now comprise nearly 30% of all new, domestic, Harley bike sales. And selling new bikes to these groups creates additional opportunity to cross-sell accessories like clothing to as well.

What’s more, Harley’s international expansion is now a key revenue driver. International sales account for 35% of consolidated sales, up 16% since 2005.

Though it’s still on top, Harley’s main competitor, Honda Motor Co Ltd (ADR) (NYSE:HMC), and motorcycle-manufacturing underdog, Polaris Industries Inc. (NYSE:PII), are doing quite well in their own rights.

Competition

Since 1959, Honda Motor Co Ltd (ADR) (NYSE:HMC) reigned as the world’s largest motorcycle manufacturer and the second-largest motorcycle manufacturer in the US. However, right now Honda has a profit problem. The Bank of Japan is driving down the value of the yen against the dollar with its $1.4 trillion bond purchasing program, which drove rates down to .80% for Japan’s 10-year bond. The plan is sending investors out of Japanese bonds priced in Yen and into higher-yielding investments. And it’s hurting Honda’s bottom line.

Despite a 2.8% increase in unit sales, currency translation effects decreased revenue from motorcycle sales by 0.7% from the previous year. And, despite increased cost reductions, operating income totaled ¥110.2 billion (USD 1.1 billion), a decrease of 22.7% from a year prior.

Shinzo Abe, Prime Minister of Japan, will continue to instruct the BOJ to devalue the yen against foreign currencies, like the US dollar, until he believes the Japanese economy has recovered. So, for the near-term and despite motorcycle sales growth, Honda’s bottom line will continue to struggle. Thus, I believe it unwise to hold shares of Honda stock until the interest rate situation improves.

Harley’s lesser-known competitor, Polaris Industries Inc. (NYSE:PII), is the recreational-vehicle industry’s heavy-hitter. Polaris is the market leader in off-road vehicles and snowmobiles. But, despite the success of its other divisions, Polaris’ motorcycle-manufacturing segment has performed weak as of late.

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