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Wednesday 13 April 2016

Comment by Editor-in-Chief, Robin Bradley

Harley share price in 30 percent, 60-day rebound

The news about Harley's recent share price performance should be as much of a relief to those of us in the aftermarket as it no doubt is in Juneau Avenue!
After having bombed in the lead-up to release of their 2015 full-year fiscals in January, Harley-Davidson's share price has rallied strongly in response to the dividend and additional share-buy back announcements that were made in early February.
From a more than 4-year low of around $37.50 the day before their annuals were released (the price had been around $55.00 some three months earlier), the price started to gain ground dramatically a week or so after they announced an increased dividend for the quarter - it had improved steadily to stand at around $49.00 as this edition of AMD Magazine went to press just before Easter.
That dividend increase, to $0.35 per share for the fist quarter of 2016, represented a 12.9 percent increase compared to the $0.31 being paid out in 2015 and took Harley's dividend to record levels - surpassing the previous high of $0.33 seen in 2009 before the company slashed its dividends for the following years in response to the downturn.
Rather than any single factor, there is a combination of factors driving the improvement - the share buy-back program, board approval for another 20m shares to be bought back in addition to the June 2015 authorization, and "value sentiment" are probably just as powerful in providing upward momentum as the dividend increase has been.
Back in December, following a one-day share price spike on heavy volume, there were renewed rumors that the company had been approached for a leveraged buy-out. Harley rebuffed the rumors with their usual refusal to comment either way, and the drama, if indeed there had really been one, went away.


'new marketing is low octane stuff'

 With a relatively low debt-to-equity ratio of around 50 percent there is headroom for any buyer to add debt to complete a buy-out, which is for sure why Harley has been opting to fund the share buy-backs with debt rather than cash - doing so delivers a double virtue of being seen to be in the market to return value to its shareholders while simultaneously eating into that ratio.
The increase to record levels of dividend following results that saw profits grow on reduced sales and market share is a statement of intent, a 'stake in the ground'.
It is designed to send a positive message - a message that says that Harley-Davidson is not in need of rescue, as such, having acknowledged, implicitly, that it needs better bikes, or at least better production responsiveness, better foreign exchange rates and better marketing!
In dispensing with the services of its head of marketing just as he announced a massive injection of additional marketing budget (in October last year), company CEO and President Matt Levatich was clearly sending additional and rather more subtle signals than just those though - he was signalling that he was in the market to respond, in the market to do so, using Harley's own resources and in the market to prevent the company being bought-out, if he could possibly help it.
In October last year he admitted that the 3 percent of market share they lost in 2015 had seen "everyone taking a little bit of our share," but clearly believed that despite the competitive pressures, despite the work to be done in production and marketing terms, the company's stock was undervalued - despite earnings per share falling short of analyst expectations.
The steps taken this year are a clear signal that the company still believes this to be the case, and it would appear that they have finally managed to kick-start that "value sentiment" and get it moving back in their direction.
Levatich has spoken of Harley having to "up its game" and back in September gave a speech in which he addressed changes in production timing (relative to demand) and the need to be "responsive and flexible," deploying what he described as "surge" to produce fewer bikes when demand is at its lowest, while still being able to pick it up when demand is strongest. He said that they need to be able to respond to that demand by building "the motorcycles that are in demand and build them for markets where sales are happening, not for markets where they're not."
Levatich described it as being "as close to consumer demand as we can be" and being able to "read the market and build what customers want, not have them buy what we built six months ago."
Laudable aims that will, possibly, allow them to bridge themselves to new platforms, but as Harley's "new and improved version 2016" marketing campaign gets underway, it doesn't appear to have stopped them still trying to persuade consumers to cherish the past rather than get excited about the future. Legacy, heritage and emotion remain the name of the game, not handling, performance, reliability, safety, value or the kind of forward facing new-gen expectations of the ownership and riding experience that are fuelling the growth their competitors are exploiting - the message appears to be "never mind the metal, feel the love."
Indeed having seen some of the visuals and the new films, it is hard not to judge the "new" marketing as being the same as the "old" marketing - in terms of current market opportunities, developments and trends it is pretty "low octane" stuff.
If this year’s MY2017 announcement is more fine-tuning of existing platforms, more paint and power for existing product offerings rather than new platforms for new customers, then regardless of how assiduously Harley tries to court its core customer base (which is anyway what Wandell said they should be doing in 2009, rather than trying to chase new riders with old product), it won't meet Levatich's stated aim of expanding the base.
Regardless of investor sentiment and balance sheet performance, they will still be running the risk of self-combustion rather than be igniting the new passions required for "Live the Legend" to have 21st century meaning.