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Tuesday 17 August 2021

Comment by Editor-in-Chief, Roibin Bradley

That's What You Call Real American Capitalism!

The response to Harley's second quarter results by Wall Street investors and their analysis was less than wholly enthusiastic with its share price losing over $20 of value in the space of eight weeks either side of the announcement.
The general malaise and uncertainty that continues to shroud stock market sentiment so far in 2021, despite all three primary markets and indexes regularly posting new highs, is as much a comment on fear as it is on knowledge and understanding.
The global pandemic has rattled cages and regardless of the rapid comeback from the share price crash seen in March 2020, having mostly recovered most of its ground by Q4 last year, it has stalled since.
This appears to mean that the slightest 'head cold' sends sentiment tumbling, and in the case of Harley's share price, there is very little to justify the uncertainty.
In his Q&A session with analysis on the occasion of Harley's Q2 fiscals unveil in July, Zeitz appeared (to me at least) to be striking the right balance between pleasure at seeing good results and (already) 'proof of life' where the key markers of the Hardwire corporate strategy are concerned, and ongoing and widely shared caution in the face of motorcycle market, supply chain and wider economic headwinds.
Consumer confidence is just as fickle a beast as investor sentiment notoriously is - neither rational nor predictable, but irrational and unpredictable. Indeed, it is the jeopardy of market instability that makes stock exchanges the most compelling and highest stakes form of sports betting we have.
Matt Levatich and his trusty CFO sidekick John Olin made it a sacred tenet of their 'More Roads' corporate plan that the anticipated 100 new models in 10 years and other planned changes they were eyeing would be self-financing, with no major long-term debt being harmed in the making of their ambitions.

"buy shares while they are cheap"

While Jochen Zeitz has jettisoned most of the plans launched in the 'More Roads' document, one of the few fundamentals that he has carried forward has been to avoid using debt to drive capital expenditure.
Indeed, Harley's $2 billion plus cash position makes them so strong at this time that the debt it took on as an emergency guarantee of its ability to survive the pandemic remains largely unspent. The result being the possibility that Harley may resume share repurchases, in addition to its dividend payments and ongoing capital expenditure on new model development and the other reboot provisions of the Hardwire strategic plan.
So, what has happened to investor best practice of studying the fundamentals? Instead, the markets are into 'just because it isn't raining, doesn't mean that it won't rain' territory, and not only with Harley. They are turning being risk averse into a food group. No longer is it the purpose of investment to fuel profit opportunities, but instead it is to just act as an inflation hedge. What happened to American ambition?
I've been listening to those Q&A sessions for years, but these days you can almost hear the fear in the analysts' voices - a fear of the capitalist dynamic.
Regular readers will know that I was beating the drum of Harley as an ADV bike manufacturer for years before it eventually emerged that it was indeed edging in that once blasphemous direction - despite it, actually, being the real origins of American style motorcycling.
If you discount the engineering deficit that we now know doesn't exist, it never really was a gamble, more just a self-financed calculated risk. After just three months, the (albeit modest) planned production for 2021 has already sold out with the Pan America already emerging as the best selling ADV/dual sport model in the United States for May and June.
Harley is serious about its presence in what many still dismiss as a niche - it may well be, but it is not a trivial one. Although the ADV market is small in the United States in unit terms, way smaller than in Europe for example, Jochen Zeitz has made it clear that he does not believe it needs to stay that way and is determined that, domestically at least, Harley should lead it.
Now that's what you call American ambition!
During the second quarter, the Pan America was followed by the re-imagining of LiveWire as a Bar 'n Shield 'Brand Mate' and bringing conclusive to the pricing issue that has dominated the original model's progress - the metal has lagged the brand. But not now. Now the program makes sense.
Again, it may well remain a niche for some time to come yet. Indeed, if the gospel of 'Synth Gas' can finally attract enough believers, then maybe, just maybe, it will stay that way. Unlikely though that may be now, but technically it would be a perfectly plausible and valid solution.
Either way, LiveWire One positions the brand to compete in an ambitiously American way.
Then there comes what to do with the venerable Sportster. Does 65 years of faithful service buy a brand a break?
Rather than even worry about trying to break through the brick wall of emissions regulations in Europe, Harley elegantly danced round the issue by simply dropping the line there for 2021. Better still, in advance of achieving escape velocity from the profit killer so-called "entry level" $6k to $12k price point, say hello to their "all-new Sport category."
As seen elsewhere in this edition, the Sportster S is the first of a new family of performance-oriented Sportsters; that 975 cc Rev Max developed for the abandoned 'Bronx' streetfighter is going to come in useful after all.  
Compared to the glacial, sclerotic rate of corporate evolution since Keith Wandell laid down his scalpel, Jochen Zeitz has kicked sand in the face of stagnation and responded to the challenges by meeting them head on and beating them into submission.
In just 18 months he has shown Harley's baggage a clean pair of heels, and with all due kudos to the new management team and stricture, and to everyone downwind of them, if the pace of change in the past 18 months is anything to go by, you should all grab a bunch of them there shares while they are still going cheap!