Written by Alex Hughes, StocksInValue International Research
Founded in 1901, Harley rose from humble beginnings to become the world’s largest motorcycle manufacturer by 1920. The company played a key role during World War One by supplying 15,000 units to the US army. However, as the Great Depression ensued in 1929, Harley saw its sales fall 82% over the four years to 1933, a time of tremendous challenge for the company and much of the world in general. Through ingenuity and innovation, Harley was one of only two US motorcycle manufacturers to survive this period; the second being Indian.
Fast forward to 2015 and Harley continues to dominate the large motorcycle market in the US, with more than 50% of a concentrated market where the top 5 players control 92% of total sales. However, it is not just the size of Harley’s market share that is important, but the consistency. Harley has tremendous brand loyalty, an asset that is incredibly valuable and equally hard to build. If you had $10B, you could certainly replicate Harley’s manufacturing capability, but it is highly unlikely you could replicate the ‘share of mind’ it has built over its 114 year existence. For many riders, the decision to choose a Harley is an enduring choice which recurs irrespective of the alternatives. In extreme cases, the rider’s whole identity is intertwined with the brand of the motorcycle they ride, somewhat similar to the V8 fans of Ford and Holden on our domestic shores. Harley seeks to build this brand community by sponsoring rides, rallies and events. Its Harley Rider Academy continues to grow and the Harley Owners Group recently exceeded 1m members worldwide.
It is these factors and more which allow Harley to charge a premium price, which help generate 11% net margins and returns on equity consistently above 25%. As Warren Buffett said at the 2013 Berkshire AGM, ‘any company that gets customers to tattoo ads on their chests can’t be all that bad’. Given the duration and consistency of Harley’s market share, we think it is reasonable to assume that Harley will continue to command 50% of the US market; hence the next step is to determine how the market will evolve over time.
Harley’s sales profile is closely intertwined with general US economic growth. In addition, Harley also benefits from the recent falls in commodity prices such as oil and steel, which helps to lower operating costs with decreased input costs (steel) and increase disposable income (oil).
We have a favourable view of US economic growth over the long term, and hence we expect Harley-Davidson to follow along with this positive trend. At present, we do not think Harley-Davidson is excessively priced.
Key Rationale & Analysis
- The dominant player in the large motorcycle industry with US market shares consistently above 50%.
- High degrees of brand loyalty gives Harley nominal pricing power, which contributes towards its industry leading margins and profitability
- Favourable industry trends with adoption of motorcycles increasing on a per capita basis. Registrations remains 42% below their 2006 peak
- A positive view on the US economy is needed as Harley’s sales profile is closely correlated with US economic growth
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