We came across a bullish Harley Davidson (HOG) thesis on Valueinvestorsclub. VIC is one of our favorite sites to follow because the ideas are usually posted by aspiring analysts who are trying to find holes in their own thinking. We find the ideas presented on the site well thought out and definitely worth checking. Click here for the full article. Below we summarized the HOG bullish thesis shared by lightspot when the stock was trading at $25:
HOG is a classic case of an iconic brand with hidden value locked due to poor management. The company, finally, seems to be getting a fair chance to attempt a recovery from losing streaks and ultimately, generate profits. Bike sales skidded from the peak seen in 2006 as the previous management’s strategy revolved around volume. The sheer inventory build-up created a dent in the resale value and in turn, hurt sales.
HOG’s financial health took a turn for the better after the new German CEO Jochen Zeitz took the reins. Zeitz was credited with turning a popular, but near bankrupt sport shoe company’s fortunes around. Zeitz’s plan to resurrect the HOG sales, revenue, margin, and the brand was clearly laid out recently.
The new management’s priority will be aggressive cost-containment and better inventory management to realign demand and supply. In addition to the core motorcycle manufacturing business (HDMC), HOG has a financial service vertical (HDFS). An assumed valuation of the latter at 10x 2021 would take the former to <7x 2021 EBITDA and 5.5x 2022 EBITDA. A successful cost reduction can increase the odds of better margins and thus restore a dividend in the neighborhood of 5% and stock valuation of $35. And, a return to 10% operating margin by 2023 could take the stock to $50 with 15x forward earnings.
Slashing of inventories, exit from unprofitable international markets and termination of underperforming dealerships is all part of HOG’s strategy to bring the operating margins back on track. Inventory management should bring scarcity value to the fore, while pre-2006 acquired bikes are ready to go scrape yard, increasing demand. Focus on key markets in North America, Europe and APAC should aid consolidation of resources for higher output. Improvement on all above fronts is visible in the recent financial data.