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Monday 15 November 2021

Comment by Editor-in-Chief, Robin Bradley

Reasons to Be Cheerful - Parts I, II and III

For those who read my Comment piece in the last edition ('Economists Were Invented to Make Weather Forecasters Look Good' - November), well, I was half right - though that still means I was half wrong, which is no better than a coin toss really!
Last month I was writing just three days before Harley and Polaris were due to announce their Q3 Fiscals. I predicted that both would probably have done quite well - 'okay-ish' at worst - and that both should therefore start to see some stock price bounce.
Well, bad on me, but I completely omitted to discuss the logistics and supply chain issues that really are now starting to shape our industry - in OEM and aftermarket terms - and the arising issues of inflation and low inventory.
Specifically, the semiconductor issue and the fact that most analysts are starting to say that this could still be affecting trade as far out as 2023.
In the case of Polaris, the impact that supply chain issues have had on the company's progress has really held it back. The  results were not well received by investors and its share price took a dump in response. It dropped from an October high of around $132 to as low as $114, and although it has since recovered some ground, it was still languishing at the $121 mark, and at the time of writing (November) some 20% below its 2021 high of $146 in April.
In Harley's case it would appear that, as far as investors are concerned, the company is in safe hands in management terms and managing its supply chain issues better than many (including Polaris).
Indeed, to the extent that stock price fluctuations are any kind of suitable measure (which isn't very much despite my obsession), it may be that Harley is going to be allowed to step down off the Wall Street naughty step soon.

demand at near decade high

Its share price was around $35.50 at the time of its Q3 filing and promptly popped a tad to be close to $40.00 by November 1st. Even though it has fallen back a couple of bucks, it is still way healthier than its 2021 $32.00 low in February - though there is still much ground to make up before it gets close to its May 2021 high of around $52.00.
So, were my forecasts hubris or sage? A little of each. Given that Harley CEO Jochen Zeitz has not had vast swathes of low hanging fruit to prune, in the way that Keith Wandell did in 2009, then it is fair to assume that, if it is measuring anything, Harley's share price response to its Q3 Fiscals is, at least in part, as much commentary on his management team's ability to housekeep within limited wiggle room as it is on anything else.
Management of the supply chain at a time of unprecedented pressure is an achievement, but so too is the management of output pricing - the prices Harley's customers pay. Yes, there are some price surcharges, but all things considered, Harley's is a conservative approach to inflationary pressure price pass-on.
A reversal of the new model strategy showcased in the 'More Roads' (To Oblivion!) strategic plan, but by no means an abandonment of ambition. Far from it. Harley's moves in the "new model space" are to be welcomed and the management complimented for their execution.
Conversely, over at Polaris, if anything, the concern (for some time) has been whether or not its barely break-even involvement in the motorcycle sector will survive the pressures of an, apparently, worse supply chain problem. Polaris has already moved to sell at least a couple of its Scott Wine era acquisitions (GEM and Taylor Dunn), so ROI is clearly in the crosshairs as capital also comes under pressure.
While powersports dealers may be getting list, or better, and therefore maintaining good margin performance, the inventory shortage will mean less capital is being generated. While a good used market performance makes for a good dealership performance (why sell a product once when you can sell it twice or even three times), input and output price pressure is inevitably followed by the orthodox economic strategy of switching on the interest rate hosepipe to tamp down inflation.
That in turn will increase the cost of flooring (as lenders look to make more from lending against less inventory) and of other forms of capital finance as stores try to sustain operations on less cashflow.
We have not even arrived at the mid-point of this story yet, never mind being about to read the final chapter.
Ironically, and for the first time ever, all this is playing out not against a backdrop of soft demand, as would generally be the case in a recession, such as in the 2007-2009 financial crisis, but at a time when demand for motorcycles, for all Powered Two-Wheelers (PTWs) and powersports vehicles in general, is running at a near decade high.
After fears that the rebooted demographics of the 21st century and the increasing pressure on that age old favorite family pastime of burning hydrocarbons might see the sands of time for the plucky old motorcycle industry running out, along comes a pandemic no less, and in the blink of an eye we are flavor of the month again - in urban mobility, environmental and leisure pursuit terms.
If you actually stop to think about the dynamic of change that has reshaped the powersports industry landscape since March 2020, then you really couldn't have made up what has been seen.
For a year now, the primary question I have been asking here in AMD Magazine and in Europe in International Dealer News is: will it, can it sustain?
We none of us can know that for sure, but with the skids under the previously inexorable growth in demand for mass transit, and with the environmental solution, safety improvements and impending traffic management interconnectivity of "Our Product" now firmly on the horizon, our industry may, just may itself also be coming down from society's 'naughty step'.
In the years and decades to come, those with long-term skin in the game where the future of the motorcycle and wider PTW and powersports industries are concerned may, just may have finally found the ubiquitous "reasons to be cheerful." I still think Ian Drury was an underestimated genius!