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Have you ever heard the little saying “this little piggy” when referencing a child’s toes? Let us refresh your memory. It goes a little something like this: “This little piggy went to market, this little piggy stayed home, this little piggy had roast beef, this little piggy had none and this little piggy cried weee weee weeeeeee all the way home.” Now, we bring that up, because the very first pig referenced doesn’t go shopping at the market. Going ‘to market’ means he was sold for his meat. That means he was also being put down. Well, one hog that refuses to go to market is Harley-Davidson, Inc. (NYSE:HOG).
We have to tell you, we were quite bearish on this stock up until about two years ago. We had been long this stock, then we strongly shorted the stock, and got bullish again in late 2020 when the company announced it had a transformational plan that it was working on, which it completed much of in 2020 and 2021. The stock has had a nice run and is looking to break back to challenge its 52-week high if it can keep the momentum going following its Q3 results.
We want to say this. HOG stock is cheap, and it may finally be looking to break out. But this stock is famous for starting to move and then collapsing. All market pressure aside, the company has really proved it is a survivor once again. Sales are impressive, and the earnings power really is eye-popping. We think shares have an upside to the high $40s, provided the overall market does not face another big selloff (which it easily could with more rate hikes in store).
We are bullish here in the low $30 range. The Q3 report had key strengths and weaknesses to be aware of.
Harley-Davidson’s revenue is back on the rise
Revenues had faced immense pressure before COVID as the company needed to adapt to the changing landscape. When COVID hit, well, most companies faced pressure for a few quarters. Unfortunately, the pressure was really on Harley-Davidson, as it was not only facing a consumer less interested in motorcycles, it also was coming into an ESG revolution. Part of the success here is the company has been moving into electric bikes, working to make bikes affordable, and has been expanding into key markets as part of its “Rewire” plan. The last few Q3 sales results show this pretty clearly overall, but sales growth has returned.
As seasoned traders and experienced investors, we will tell you that it is still key to realize management forecasted some improvement, but the company knocked it out of the park on the topline here, folks. While we were expecting a high single-digit sales increase, we were floored at the results. The sales came in higher at the same time that the company had diligently worked to control expenses. That is a winning combination. Overall revenues rocketed higher by 20.4% year-over-year, from $1.36 billion to $1.65 billion. And our projections were liberal relative to consensus, the latter which was beat by $290 million.
It was a stellar quarter on the topline, but what went into these sales?
Discussing Harley-Davidson’s Q3 sales
Here is the thing. Harley sells motorcycles, but it also makes money from associated parts, as well as accessories. It also does some work in financial services. Motorcycle sales are a key driver of course, through its Harley-Davidson Motor Company, which sells in five segments: Motorcycles, Parts/Accessories, Apparel, Licensing, and a catch-all “other” segment. What we can tell you is that, for years, trends in the U.S. have been weak, but Harley has been working hard to bring youth into riding. It is also expanding internationally. Let us discuss the sales trends.
As you can imagine, with a huge revenue number, HDMC saw great success, with 24% increases in revenues here on very strong volumes. We saw a 28% increase in motorcycle sales, with strong volumes and pricing. Revenue from motorcycles rose to $1.13 billion compared to revenue of $886 million last year.
Of course, actual shipments were way up and this was a major boost to the topline figures. The company shipped 57,100 motorcycles to dealers and distributors worldwide during the quarter, compared to shipments of 47,900 last year. There was a total 19% increase in shipments, but we thought it would be lower frankly, around 55,000.
The other segments of the HDMC were a bit mixed. Sales were down 2% in parts and accessories as there was lower retail motorcycle volume. Much of the increase in shipments was due to wholesale. Apparel revenues spiked 41% to $70 million while licensing was up 26% to $11 million. Finally, the so-called ‘other revenues’ were up 74% to $22 million. This was solid.
The company did better than we thought. The strength in the topline was driven by wholesale shipments largely. What we find interesting is that retail sales were very mixed. This prevents us from being very bullish. Retail motorcycle volumes were down 5% in North America to 32,200, down 4% in EMEA to 9,100, down a disgusting 27% in Latin America to just 800, but they rose sharply in Asia-Pacific to 7,600. Globally, it was a 2% decline. Inventories were an issue in the U.S. Overall, though, the numbers are strong. We will also point out that Harley-Davidson financial services saw a 3% increase in revenue.
Expenses managed and margins widened
Harley-Davidson for years was working on manufacturing optimization to help control expenses and improve margins going forward. It has paid off. Gross margin was up about 740 basis points from last year to 34.1%, much better than we anticipated, and the best Q3 in years. Operating margin widened to 17.9%, from 8.4%.
This all combined to lead to net income of $261 million or $1.78 per share. This was up from $1.05 a year ago and crushed consensus by $0.38, a huge positive. Q3 results reflect the actions taken under the company’s “Rewire” effort, along with strategic moves to boost sales, and general consumer dynamics.
Looking ahead
Looking to the next decade, “The Rewire” was a critical overhaul of its business, setting a strong foundation for the company including a new operating model that realigns the organization for performance, reduces costs and sharpens focus on profitable products and markets. We think it has been largely successful in delivering profitable growth and shareholder value. Now the electric bikes issue? Well, the company just completed its merger with the SPAC that was LiveWire. LiveWire Group, Inc. (LVWR) now is live and trading. Harley owns a nearly 90% stake in this, and this is the electric bike division. We think it stands to do well.
For the year, the company is expecting HDMC revenue growth of 5-10% and operating margins of 11-12%. The company continues to repurchase shares and also pays a nice dividend of $0.1575 per quarter.
Take home
We think shares will make a run to challenge the 52-week-high. With the dividend, share repurchases, and demand, we are bullish, though recognize the high rates of financing, and possible recession could be risk factors. Overall, one thing is certain, HOG will not go to market.
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