Harley-Davidson (HOG) is a true American icon. Its motorcycles are so distinctive that the company actually tried to trademark the “Harley sound,” that familiar rumble of the bikes’ exhaust, back in the mid-1990s.
It’s also a well-managed company and one of those true rarities: a successful turnaround story. This is a company that was facing bankruptcy in the early 1980s, yet managed to rebuild itself into the pride of American manufacturing … and it’s the subject of countless case studies in MBA programs worldwide.
Harley’s management was able to pull off the coup by leveraging that intangible quality that is so hard to imitate: brand cachet. For a particular breed of leather-wearing motorcycle enthusiast, there is simply nothing on par with a Harley.
But all of that said, I wouldn’t touch Harley stock … at least not at today’s prices.
Harley-Davidson (HOG): Worth the Premium?
At first glance, HOG would appear only modestly overpriced. It trades for 20 times trailing earnings and 2.5 times sales, compared to 19 and 1.6, respectively, for the S&P 500.
A modest premium might be appropriate for an iconic company with Harley’s branding power (and not to mention its high return on equity of 26.1%). But consider that Daimler (DDAIF) — a company that knows a thing or two about vehicle branding — trades for just 10 times trailing earnings and 0.60 times sales.
Yes, I realize it’s not an apples-to-apples comparison and that Harley runs a higher-margin operation in a business with fewer direct competitors. All else equal, Harley should trade at a slight premium to a larger automaker like the current Best Stocks of 2013 leader.
But all else is not equal.
Harley has a serious growth problem, and it’s not one that will go away with a recovering economy.
Harley’s revenues still are below their pre-crisis highs (see Figure 1), and unit sales paint an even bleaker picture. Harley sold 349,196 bikes in 2006, and sales dropped to just 247,625 in 2012. That’s a unit decrease of nearly 30%!
To be fair, revenues and unit sales have enjoyed a nice bounce since the pits of the financial crisis. But Harley will never get its old mojo back for one critical reason that is completely outside of its control.
Down the road from my house in Dallas, there is a greasy drive-in burger joint called Keller’s. On any given weekend, you might see a dozen or more bikers parked in the lot, showing off their chrome-laden Harleys.
Most are over 50. Nearly all of them are older than 45.
This isn’t a coincidence. Harley-Davidson is a brand whose sales depend disproportionately — almost exclusively, in fact — on middle-aged Caucasian males. Riders younger than 40 generally lack the time, interest or the bankroll to buy a Harley. But by the time they get into their 60s or older, the noise and joint pain have whittled at riding’s allure. You still might ride in your 60s, but you’re doing it less frequently and you probably aren’t buying a new bike.