Trump loves Harley-Davidson more than investors do
Less than a week after Harley-Davidson (HOG) reported earnings that disappointed Wall Street, the motorcycle maker got a pat on the back from President Donald Trump during their meeting today at the White House.
Speaking to reporters, Mr. Trump described the Milwaukee-based company as “true American icon -- one of the greats.” He thanked the Harley execs for “building things in America … I know your business is now doing well.”
Not as well, however, as investors would like.
Harley’s 2016 fourth-quarter results, reported on Jan. 31, showed a year-over-year increase in quarterly earnings to $47.2 million versus $42.2 million in 2015. But revenues slipped to $1.1 billion in 2016’s final quarter from 2015’s $1.18 billion. And its fourth-quarter earnings per share of 27 cents fell shy of the consensus forecast of 31 cents, according to FactSet.
Harley said its full-year 2016 results slipped from the previous year. Net annual income was $692.2 million on revenue of $6 billion versus net income of $752.2 million also on revenue of $6 billion a year ago.
Shipments in 2016 were below the company’s internal forecasts. Worldwide unit sales were down 1.6 percent last year compared to 2015. U.S. sales slipped 3.9 percent, offset somewhat by 2.3 percent higher foreign sales.
“For 2017, Harley-Davidson anticipates full-year motorcycle shipments to be flat to down modestly in comparison to 2016,” the company’s earnings report said.
The results likely reflect the squeeze Harley has felt in recent years from low-cost Japanese bike makers and U.S. rival Polaris (PII), which resurrected the dormant Indian brand a few years ago. Harley has famously resisted competing on price to protect the integrity of its brand. Even so, Harley riders can find attractive deals.
“Yes, they have hesitated to discount historically,” said James Hardiman, an analyst at Wedbush Securities, who rates Harley as “neutral.” “However, I think the fact that they own their own lending arm … has allowed them to do some things that have the same effect as discounting without sacrificing the brand.”
Harley has financing promotions that have the “net effect” of lowering the monthly payment for a consumer through financing deals, though not their overall cost to purchase a bike, according to Hardiman. However, the company has a glut of 2016 model bikes because they have sold poorly. And they need to be cleared out of dealers’ showroom to make room for the 2017s.
“If you want one of those bikes right now, you can probably get a pretty good deal on it, not just on financing promotions. But you can get some discounts on those bikes,” Hardiman said. “If you asked Harley’s management team, they would tell you that they weren’t directly funding those discounts, but at the end of the day, their dealers are selling bikes for less.”
Many of the 2016 models are being sold for below the manufacturer’s suggested retail price, which used to be “taboo,” according to Hardiman.
Still, the picture for Harley isn’t exactly bleak. It has gained share during the past two quarters, thanks to the introduction of its Milwaukee 8 engines, eight-valve powerplants that have gotten rave reviews and are on the 2017 models. Unfortunately, Harley’s overall position in the market for 601-cc and larger motorcycles peaked at 55 percent in 2013 and dropped to 51 percent in 2016, Hardiman said.
Harley’s stock is currently trading around $84, a climb of some 40 percent over the past 12 months, fueled by a combination of buyout rumors and enthusiasm for the Milwaukee 8 engines. Investors are also optimistic that Harley will benefit from tougher trade policies that Mr. Trump is advocating as part of his “America First” policy.
Lately, though, the stock has been stuck in neutral, having barely budged over the past few months.
To jump-start growth, Harley plans to launch 50 new bikes over the next five years and develop new riders through its Riding Academy, which the company said trained 65,000 people in 2016.
During his meeting, Mr. Trump eluded to Harley being a victim of “abuse” in world trade. President Ronald Reagan slapped a 45 percent surcharge on Japanese bikes in the 1980s after Harley complained that the country’s motorcycle makers were dumping bikes on the U.S. market at below cost. According to Trump, Harley wouldn’t still be in business if Reagan hadn’t taken that action.
“Harley’s recovery was so successful, however, that it took the unprecedented step of asking that the tariff surcharge be repealed one year ahead of schedule, in 1987,” according to a 1999 document from the World Trade Organization.
The company has also reaped the benefits of globalization -- and some of its controversies. In 2012, Harley signed a five-year, $200 million contract with India-based Infosys (INFY) to outsource its IT department, eliminating 125 Harley jobs. Though the affected workers were eligible to get jobs with Infosys, a lawsuit was filed against Infosys for allegedly favoring South Asian workers over Americans. An Infosys spokesman couldn’t be immediately reached.
But at least for today, President Trump didn’t use that deal as a reason to beat up on Harley.
