What does the future of Harley-Davidson Motor Co. look like?
Based on what some market analysts are saying, it won't be a middle-age white male straddling a hog. But the question is: Does that matter? What's driving lowered stock forecasts?
RBC Capital Markets last month said the motorcycle maker, which employs about 1,000 at its Springettsbury Township plant in York County, could soon lose its key demographic as baby boomers age and younger generations don't want, or can't afford, to ride a Harley.
“It remains unclear,” RBC told investors, “if Gen X (or even future generations) are as predisposed to motorcycles as baby boomers,” according to business site Quartz.
The Milwaukee-based company has seen its shares fall from $71.37 on June 23, a few days before the RBC report, to $65.97 on Tuesday afternoon. Several analysts have lowered their target price to $65.
Add to the mix a recall last week of more than 66,000 Touring and CVO Touring motorcycles, made at the York County plant, because their front wheels could lock up.
But not everyone is so pessimistic. True, many analysts are moving their Harley recommendations from buy to hold, but that doesn't mean there's nowhere to go. Other demographic segments can — and are — being tapped, as well as foreign markets.
“I think they've done a pretty nice job of saying, 'We know our demographic has changed and we need to address it,'” said Jaime Katz, a Morningstar equity analyst. “I think they're doing what they can to address their new product offering.”
The company will release its second-quarter earnings before the market opens Tuesday.
Hitting new markets
Harley is still the No. 1-selling motorcycle brand in America, with about a 36 percent share of the overall market. According to a July 10 investor note from Wells Fargo Securities, Harley has been the leader since 2008.
But RBC noted that a lot of Harley's revenue — 65 percent — comes from sales to white males older than 35. Census Bureau projections that Harley reports on its website show the population of white males age 35 to 74 will gradually decrease to about 49 million by 2050 from about 50 million in 2014.
Meanwhile, that same chart shows other potential demographics — young adults 18 to 34, white women 35 to 74, African-Americans 35 to 74, and Hispanics 35 to 74 — collectively will top 200 million over that same time from about 160 million in 2014, according to Harley's projections.
In other words, the current top buyers of Harleys won't be increasing, but the potential new buyers will skyrocket.
In 2013, that means a bit more than a third of the company's revenue came from those potential buyer demographics, showing signs of growth, Katz said.
“If you think that domestic bikes sold last year were (260,839) units, you think about roughly a third of those and you have a pretty meaningful number going to new users,” she said.
And let's keep in mind Harley announced last month that it was testing out Project LiveWire, an electric-powered motorcycle that is likely to appeal to younger riders as well as riders overseas, Katz said.
Even so, Katz noted that Morningstar has been cautious in its advice to investors when it comes to Harley.
It's not alone.
Analysts at KeyBanc and S&P Capital IQ moved their recommendation to hold from buy, according to news reports. Wells Fargo still has the stock rated as “outperform” but lowered its U.S. retail sales estimate to 6.3 percent from 11 percent based on its dealer survey results. Goldman Sachs, in a note to investors on Monday, rated Harley as neutral.
What's behind the caution?
“The reason we've been cautious, while there is a lot of volume growth left for the business, the problem is in the operations side of the business,” Katz said. “They just closed on a restructuring plan. Where are they going to get any operating margin leverage going forward? It's going to be harder to squeeze the costs of goods sold.”
Part of that involved the York County facility. Harley President and CEO Keith Wandell said at a business breakfast in June that he was “shocked” at how poorly the York plant was operating when he first took over in May 2009, according to the Milwaukee Business Journal. He noted that the plant has now turned the corner.
That involved streamlining the process at the plant. For example, there were 43 buildings at the Eden Road facility, but only 23 were in use, the business newspaper said. The company improved production flow, improving performance and driving down costs.
“I have never been in a plant this bad in my life,” Wandell said. “It was very early in my tenure. And I was shocked that a company could allow an operation to become what this had become, and that was a tough one. But if you go in that plant today, it is world class.”
The recall, while not a positive, likely has little to do with the performance of the company, Katz said.
“I'm sure it will cost a few cents in repairing the problems. Rework is never free,” she said. “But mistakes happen. They acknowledged it, and trying rectify it is more important than anything else.”