To The Moon

$Harley-Davidson(HOG)$

Harley-Davidson is often regarded as the most iconic motorcycle brand in the world. However, its stock has underperformed since the 2000s, leading to significant losses for investors. While its low price-to-earnings (PE) ratio may attract some interest, the company’s revenue has remained stagnant and has even declined in recent years.

Earning Overview

Q4 2024 Financial Highlights:

Revenue: Total revenue declined by 35% year-over-year to $688 million. Net Loss: The company reported a net loss of $117 million, or $0.93 per share, compared to a net income of $26 million, or $0.18 per share, in the previous year. Motorcycle Segment: Harley-Davidson Motor Company (HDMC) experienced a 47% revenue decline to $420 million, with global motorcycle shipments decreasing by 53% to 14,010 units. Financial Services: Harley-Davidson Financial Services (HDFS) reported a 4% increase in revenue, totaling $257 million for the quarter.

LiveWire: The electric motorcycle division, LiveWire, reported an operating loss of $26 million, an improvement from the $35 million loss in the same quarter the previous year.

Fundamental Analysis

Declining Operating Income Operating income has also been on a steady decline, with only a brief recovery post-pandemic when pent-up demand was temporarily released. One positive aspect has been the company’s aggressive share buybacks, made possible by its ability to generate free cash flow—currently around $800 million. However, recent financials suggest that even this strategy may not be enough to offset the company’s struggles.

Segment Performance: A Mixed Picture Harley-Davidson operates through three main segments: Harley-Davidson Motorcycles, Harley-Davidson Financial Services, and LiveWire. In the latest quarter, the company reported significant losses, with only its financial services division remaining profitable. This segment, which includes motorcycle loans and insurance, has been a consistent source of revenue, unlike the struggling motorcycle sales.

Demand for its products remained weak, as motorcycle sales fell short of expectations. Declining returns on capital indicate that its previous profit sources are depleting. A 10× net-debt-to-EBITDA ratio reduces lender confidence, making it harder to secure additional funding and possibly leading to dilutive equity issuances.

Guidance

Net income for 2024 fell 35% year-over-year to $445 million, and in the fourth quarter, the company posted a loss of $118.43 million. Such a sharp decline in motorcycle revenue raises concerns about the company's future direction. While Harley-Davidson recovered from the COVID-19 downturn in 2020, revenue growth has stalled again. Sales have been on a downward trend since 2015, which was the brand's strongest sales year since 2010.

Harley-Davidson anticipates that revenue for HDMC will remain flat or decline by up to 5% in 2025, reflecting ongoing market challenges. In response, the company plans to expand its product lineup to include smaller, more affordable motorcycles aimed at attracting a broader customer base.

Despite current headwinds, I think Harley-Davidson will suffer in current economy policy with Trump tariff the sale will decline further.

Free Cash Flow

Cash Flow vs. Net Income Harley-Davidson’s cash flow has significantly increased, especially compared to its net income. Why? Because write-offs on debt and provisions for credit losses are not included in cash flow calculations. The company set aside $250 million for potential credit losses—money that hasn’t been spent yet—so it gets added back to cash flow. This means the reported free cash flow of $867 million is somewhat inflated, and a more realistic figure is closer to $600 million. Even at this adjusted level, the stock is trading at a five-time cash flow multiple, which is quite attractive.

Technical Analysis

(HOG) is trading at $25.35 per share. Technical analysis indicates that the stock has a support level around $20 and faces resistance near $27. Support levels are price points where a stock tends to find buying interest, preventing further decline.

Risks and Challenges

The company’s performance was significantly impacted by macroeconomic factors, including high inflation and elevated interest rates, which dampened consumer confidence and demand for discretionary products like motorcycles.

LiveWire: A Costly Bet on Electric Bikes LiveWire, Harley-Davidson’s electric motorcycle division, has been another major challenge. It recorded a $110 million loss for the full year while generating minimal revenue.

Dealer Inventory Mismanagement Several factors contributed to Harley-Davidson’s recent underperformance. One major issue was dealer inventory management. After the pandemic, dealers overstocked, expecting a resurgence in demand. However, sales did not materialize as anticipated, leading to a revenue decline despite stable unit registrations.

Aging Customer Base and Market Share Decline Looking at the long-term picture, Harley-Davidson appears to be in perpetual decline. Its core customer base is aging, and the brand has struggled to attract younger riders. Market share has been shrinking over time, and while the company’s financial services division has helped offset losses, this may not be sustainable.

Rising Credit Losses: A Growing Concern Rising credit losses, especially in a higher interest rate environment, pose an additional risk. While the current credit loss rate of 3.3% is still manageable, any further deterioration could put additional pressure on the company’s financial stability.

Valuation

What If Harley-Davidson Stagnates? Many investors wonder what happens if Harley-Davidson simply maintains its current market position without growing. Right now, shareholders benefit from share buybacks, which yield around 8% due to the depressed stock price—historically, this has been around 5–7%. Additionally, the company pays a 3% dividend. If the business remains stable, investors could see an 8–10% return through buybacks and dividends alone. While this might seem appealing, it comes with significant risk, as the company is in long-term decline and could slip further.

Market sentiment

LiveWire: A Costly Gamble You shouldn’t count on LiveWire to turn things around for Harley-Davidson. Just look at the numbers—only 600 bikes were delivered in all of 2024, while the division racked up $110 million in losses. This segment is dragging the company down in the medium term and possibly even the long term. Reaching break-even will take a long time, if it happens at all. Instead of seeing LiveWire as a potential savior, investors should treat it as a negative factor in their valuation.

Cutting LiveWire: A Short-Term Boost? One potential upside for shareholders would be if Harley-Davidson decided to cut or sell off LiveWire. Eliminating its $110 million annual losses would immediately improve financials and likely boost the stock price. If Harley-Davidson stabilizes while shedding this underperforming segment, there could be a short-term profit opportunity. However, even under this scenario, the long-term outlook remains questionable.

Harley-Davidson is facing significant challenges in selling motorcycles. Over the past five years, its stock has declined by 23.8%, while the S&P 500 has risen by 85.1% (at the time of writing). In Q4 2024, revenue dropped 35% year-over-year to $688 million, contributing to an 11% decline for the full year, totaling $5.84 billion. The core motorcycle division, Harley-Davidson Motor Company, saw a 47% drop in revenue for the quarter, with total shipments plummeting by 53%.

Looking ahead, the outlook remains uncertain. The company forecasts that its motorcycle segment revenue will remain flat or decline by up to 5% in 2025. Meanwhile, the financial services division is expected to contract by 10% to 15%, and the electric segment is projected to report an operating loss of $70 million to $80 million. Overall, diluted earnings per share are anticipated to remain flat or decline by up to 5% from 2024.

Given this lackluster forecast, it's difficult to be optimistic about Harley-Davidson’s prospects.

Conclusion

Adjusting for provisions, Harley-Davidson’s realistic free cash flow stands at around $600 million, or roughly $4.75 per share. While the stock may look cheap, the fundamental issues with the business make it a risky bet for long-term investors.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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