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Wednesday, 19 December 2018

Comment by Editor-in-Chief, Robin Bradley

Does Harley Have the Time it Needs?

Time. Forget oil, gold, bitcoins, land diamonds or a decent quarterback. The most precious commodity of them all is Time - and you can’t buy it, lease it, make it or find it stuffed down the back of a sofa.
You can borrow it though and following the way their share price has reacted to their quarterlies, their ‘More Roads’ strategic plans and their MT2019 “initiatives” you can’t help wondering, again, if Harley is living on borrowed time.
If the sharks aren’t circling it might just be that they simply don’t like the taste and smell of motorcycles any more - any kind of motorcycles. The jury remains out, for now, on just how significant the early promising signs are about the value that “New Gen” consumers place on a life on two wheels, and just how much Dollar value there is going to be on their rather more frugal “destination not the ride” attitude towards riding.
That may well evolve, it may well morph in to something rather more balance sheet friendly as they age and as the “offer” the industry presents them with matures, but for now their predilection for “lightweights” is mirrored in the interim economic value that the transitional models that they are  buying and riding has for the future of the industry.
And Harley finds itself trapped in that web of complexity by prevarication and lack of responsiveness of its own making.

'market sentiment'

The “More Roads” strategy is excellent, mostly. Okay, Harley’s heavyweight agenda influenced interpretation of where lightweight becomes middleweight and where middleweight become sellable suggests there is still much about their industry analysis that will be found wanting, gauche even, but at least those roads are, finally, headed in the right direction, mostly.
It is the speed at which Harley will be getting to its destination that really now is the worry. Worthy though the plans are (mostly!) the 36 months it is still going to take (at least) until we see those plans on showroom floors (ones that “New Genners” are already clearly showing don’t share their world view) is an eternity where insomniac capital flows are concerned.
While Harley’s dedication to keeping returns in the top quartile of S&P 500 expectations is buying them some protection, an investor community that understands the strategy of money rather than metal is not know for regarding Harley’s timescale as a comfortable one.
The past two or three months have been tough ones for Harley’s share price. Having barely batted an eyelid at the unveiling of the “More Roads” plan earlier this year the Wall Street pulse hardly quickened with the “detail” (was there any?) in the MY2019 announcement. Throughout 2018 Harleys stock holders have remained singularly unimpressed with their quarterlies and the promise of “Jam Tomorrow”.
From its recession driven low of around $8.50 in February 2009, Harley’s share price recovered spectacularly, peaking at around $72.00 in May 2014, its current five year high and not far off its all-time pre-recession record of around $74 in December 2006.
Since May 2014, describing Harley’s share price as “volatile” is charitable. Since 2014 it has been on a roller coaster, collapsing to around $38 by February 2016, recovering to around $60 by April 2017, only to slide again ever since.
It made a current 52 week high of $56 in January 2018, drifting down to around $45 by the end of September before sliding again to a low of around $36 by the end of a month that saw it lose some 16% of its value.
At the time of writing a recovery of sorts had set in, to around $43 (December 3rd 2018) and with its “intrinsic” value estimated to currently be around the $48 mark it could well recover further - before the reality check in January of a final quarter that, logic dictates, will quite probably be its worst for years with unit sales dragging the company uncomfortably towards the red. 
Harley has done a good job of protecting the bottom line as well as the dividends with a profit to earning ratio of 13.50 for the third quarter off of +14& revenue despite -13% unit sales. Indeed with cash on hand of around $800m (+85%) and diluted earnings per share steepling for Q3 at +70% you’d think Harley would be a wall Street Darling.
But such performances are not sustainable without some serious underlying growth in unit sales and therein lies the problem. With the “More Roads” initiatives being at least 36 months away still (and even then predicated on Harley being successful elsewhere in its planning, especially where dealership policy is concerned) and “headwinds” coming up like mushrooms (tariffs, market decline, demographic deficits, strategic costs) an eight straight quarter of sales decline for Q4 (marking a 15th out of the prior 16 quarters) is likely to weigh heavily on January market sentiment.
For investors Harley’s turnaround story isn’t going to be an easy one to wait for. Q4 has traditionally been Harley’s weakest and if domestic sales were to slip to the 22,000 to 24,000 mark it would quite likely unleash a storm of impatience and danger.
After a flurry of institutional buying in the winter and spring of 2016 and 2017, and despite some investment houses increasing their stakes so far in 2018 (Wells Fargo increased its stake during Q3) but with some 88 percent of Harley stock owned by large number of hedge funds and institutional investors with relatively modest stakes in overall terms (Wells Fargo recent investment took their stake to 0.24% ownership of Harley overall, for example) the risks of a widely spread ownership portfolio could start to overtake the advantages of reduced dependency on a small number of large percentage owners as the opportunities to bank a reasonable return and move capital to faster moving investment opportunities proves irresistible.
Against that background the smell of the bait may well indeed start to prove tasty once more. The time it is going to take Harley to bank the benefits of its plans are again pointing to the desirability of taking itself private, de-listing until the results of the industry changes and developments we are at the  early stages of witnessing have started to more fully play out.