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Harley-Davidson, Inc. (HOG)
October 19, 2015
Lowering Estimates (Again) After Lackluster September
• Our Harley dealer contacts have seen 3Q retail up 1-2%; July +2%; August up
4%; September flat). This is actually worse than the ~2% organic growth (-70 bps
reported + 300bps of Street-related drag) during 2Q and a step down from what
management noted was near-double-digit growth in June.
• With respect to the MY16 new bikes, dealers are most excited about the Road
Glide Ultra as well as the additions and upgrades to the Softail line. However,
dealers seem somewhat less excited following a month of sales than they were
immediately following the MY16 announcement, given lackluster September sales
overall.
• We continue to have our doubts that retail trends during the remainder of the
year will be enough to achieve management’s 2015 shipment target. Our
math would suggest that the company needed to deliver 6.5%-7.5% retail growth in
the back half of the year just to achieve the lower end of the guidance. If our
growth (or lack thereof) estimate for 3Q is accurate, we would need to see ~14%
4Q retail growth to achieve the FY15 shipment bogey.
• Given the weak retail trends during 3Q, we are again lowering our 3Q EPS
estimate by a nickel to $0.79, consisting of a reduction to our domestic retail
assumption from 4% to 1.5% and a commensurate reduction in our gross
margin assumption. We are now in line with the Street for 3Q, in that although
our retail and gross margin assumptions are short of consensus, we believe the
Street is underappreciating the benefit the company gets from a more normalized
wholesale/retail relationship versus last year’s 3Q inventory drawdown.
• Our 2015 EPS estimate of $3.90 (down a nickel) is $0.12 beneath the Street,
whereas our 2016 estimate of $4.61 (down $0.07) is $0.04 ahead of the Street.
Our full-year shipment estimate of 270K falls well short of management’s guidance
of 276-281K.
• Trading at less than 12x our 2016 estimates, Harley-Davidson is the cheapest
stock in our coverage universe. That said, the direction of the company and by
extension the stock is as uncertain as ever. 3Q has done little to add clarity to the
story going forward, and so in the absence of any reliable catalyst for retail
improvement, we are maintaining our NEUTRAL rating and $57 price target.
FYE Dec
2014A
REV (M)
ACTUAL
CURR.
PREV.
2015E
CONS.
CURR.
PREV.
CONS.
Q1 Mar
Q2 Jun
Q3 Sep
Q4 Dec
Year*
Change
$1,572A
$1,834A
$1,131A
$1,031A
$5,568A
0.059
$1,511A
$1,651A
$1,176E
$1,051E
$5,388E
-0.032
$1,511A
$1,651A
$1,206E
$1,084E
$5,452E
--$1,208E
$1,165E
$5,532E
$1,429E
$1,715E
$1,351E
$1,039E
$5,535E
0.027
$1,435E
$1,724E
$1,383E
$1,056E
$5,598E
$1,538E
$1,761E
$1,250E
$1,150E
$5,768E
EPS
ACTUAL
CURR.
PREV.
CONS.
CURR.
PREV.
CONS.
Q1 Mar
Q2 Jun
Q3 Sep
Q4 Dec
Year*
P/E
Change
$1.21A
$1.62A
$0.69A
$0.35A
$3.86A
14.351x
0.183
$1.27A
$1.44A
$0.79E
$0.40E
$3.90E
14.213x
0.01
$1.27A
$1.44A
$0.84E
$0.40E
$3.95E
--$0.78E
$0.49E
$4.02E
$1.30E
$1.75E
$1.19E
$0.38E
$4.61E
12.027x
0.182
$1.30E
$1.75E
$1.25E
$0.38E
$4.68E
$1.43E
$1.71E
$0.91E
$0.53E
$4.57E
Leisure
2014A
Price
$55.41
Rating
NEUTRAL
12-Month Price Target
$57
James Hardiman, CFA CPA
(212) 833-1362
james.hardiman@wedbush.com
Sean Wagner
(212) 833-1363
sean.wagner@wedbush.com
Company Information
Shares Outst (M)
Market Cap (B)
52-Wk Range
Book Value/sh
Cash/sh
Enterprise Value (M)
LT Debt/Cap %
205.967
$11.413
$50.64 - $70.41
$14.68
$7.088
$16179.323
0.601
Company Description
Harley-Davidson, based in Milwaukee, WI,
is a leading branded manufacturer and
marketer of premium motorcycles. The
company also provides wholesale and retail
financing along with insurance programs to
its dealers and retail customers.
2016E
2015E
2016E
Source: Thomson Reuters
Consensus estimates are from Thomson First Call.
* Numbers may not add up due to rounding.
Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision. Please see page 11 of this
report for analyst certification and important disclosure information.
3Q15 Channel Checks
3Q15 Organic Sales Growth of 1-2% after Flat September
Based on our channel checks of 40+ dealers, we believe 3Q15 reported registrations were up 1-2%, which consisted of ~2% growth
in July, ~4% growth in August and flattish growth in September. This compares to the 0.7% decline in retail sales reported for 2Q15,
which was identical to the 1Q decline and essentially in line with our flat estimate.
Figure 1: 3Q15 Sees 1-2% Growth
HOG Y/Y Sales Growth
Jan Feb Mar
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
N/A
18%
4%
N/A
-4%
-12%
-8%
-40%
5%
15%
0%
-7%
4%
4%
14%
8%
N/A
1%
-8%
-9%
-45%
2%
15%
2%
6%
1%
30%
N/A
16%
8%
9%
5%
-18%
-9%
19%
4%
19%
-12%
9%
-3%
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Q1
Q2
Q3
Q4
9%
10%
8%
6%
-4%
-6%
-18%
5%
4%
10%
1%
11%
-2%
6%
8%
6%
8%
1%
-12%
-25%
-7%
6%
13%
3%
10%
0%
12%
14%
N/A
6%
3%
-13%
-35%
-9%
8%
12%
6%
4%
3%
15%
8%
3%
5%
3%
-15%
-26%
-15%
6%
-3%
8%
-1%
2%
18%
4%
5%
3%
-3%
-15%
-21%
-10%
9%
-6%
17%
2%
4%
11%
1%
5%
3%
-4%
-11%
-26%
6%
0%
0%
9%
1%
0%
8%
2%
3%
1%
-6%
-14%
-26%
-2%
5%
6%
12%
5%
-5%
0%
3%
0%
-6%
-18%
-25%
-1%
6%
8%
9%
0%
7%
4%
1%
4%
-9%
-24%
-29%
-5%
12%
1%
-2%
7%
4%
16%
7%
9%
1%
-13%
-9%
-22%
4%
17%
-6%
5%
-1%
9%
11%
7%
7%
0%
-10%
-26%
-4%
6%
12%
4%
8%
0%
15%
4%
4%
4%
-1%
-14%
-24%
-6%
6%
-3%
11%
1%
2%
3%
2%
2%
2%
-7%
-19%
-27%
-3%
7%
5%
7%
4%
Harley-Davidson Survey Y/Y Motorcycle Sales Estimate vs. Reported
Domestic Registration Growth
(Correlation=92%)
20%
10%
0%
-10%
-20%
-30%
Reported Domestic Registration Growth
Wedbush Estimates
-40%
Source: Company data, Wedbush Securities, Inc.
While the 1-2% growth in 3Q appears to be better than the reported 0.7% domestic retail decline seen in 2Q, as we have discussed,
the 2Q15 reported retail numbers were somewhat misleading since HOG’s 2Q14 numbers included ~1,600 bikes that were sold to
dealers as part of the Rider’s Academy program but included in the retail sales numbers. These created a ~300 bp headwind during
2Q15, without which retail sales would have been up 2.1% in 2Q.
During our last series of channel checks our dealer contacts expressed a higher level of excitement about the new model year 2016
bikes than we had when they were announced. However, after nearly two months of sales, opinions of the new model year have
soured somewhat. The 2014 model year introduced the first of the Project Rushmore bikes, which have gone on to be extremely
James Hardiman, CFA CPA (212) 833-1362
Harley-Davidson, Inc. | 2
popular models, while last year’s lineup reintroduced the popular Road Glide model after a one-year hiatus and included surprise hits
like the Low model touring bikes and the new Freewheeler trike. Although there were not any similarly drastic changes to the existing
model lineup in MY2016, the new Road Glide Ultra and the S model Softails are seeing solid demand and have been enough to
generate minimal retail sales growth in the quarter. However, the rest of the incremental changes don’t seem to have helped ignite
sales in the struggling cruisers.
Sales in 2Q and to a lesser extent 3Q were stoked somewhat by incremental finance offers. Most notably an offer of 0.99% interest
rate and no money down was available to the highest credit tier of buyers on all models except for Trikes and CVOs (both highdemand model lines) starting in June. The goal of these financing incentives was to help bridge the gap between Harley’s bikes
(which are not being directly discounted by the manufacturer) and the discounted rates of its competitors (mainly the Japanese).
However, while financing offers were available throughout 3Q they applied only to Touring and Street models and got less
aggressive as the quarter wore on. By mid-August these scaled back offers were comping against much more aggressive offers on a
wider range of bikes in 2014.
Figure 2: 3Q14 and 3Q15 Heavy on Financing Promotions
2015
2014
Dates
Bikes Covered
Incentives
7/1/14-9/2/14
Over 30 Sporster, Dyna, Softail and V-Rod models
$0 down and financing as low as 3.99%
8/15/14-10/31/14
Forty-Eight, Fat Boy, Switchback, Fat Boy Lo, Softail Deluxe, Wide
Glide, Heritage Softail Classic, 1200 Custom
$0 down and financing as low as 0.99%
June-15
All 2015 models except Trike and CVO
$0 down and 0.99% APR for up to 60 months
July-15
2015 Touring and Street
$0 down and 0.99-1.99% APR for up to 60 months
August-15
2015 Touring and Street
$0 down and 0.99% for 60 months or 2.99% for 72 months
September-15
2015 Touring and Street
$0 down and 2.99% for 72 months
Source: Company data, Wedbush Securities, Inc.
Looking back to last year, as sales of units other than the popular Touring models slowed in 2Q, retail inventories mounted. As a
result, HOG began offering a number of incentives to clear out the channel ahead of the MY2015 shipments. The promotions only
applied to Sportster, Dyna, Softail and V-Rod models and ran from July 1, 2014 until September 2, 2014. The incentives included $0
down payments and low APR financing offered to qualified buyers on loans ranging from 24-72 months.
Conversely incentives available in 3Q15 were only applicable to Touring and Street bikes, which was somewhat problematic among
our dealers as 1) Street purchasers are usually ineligible as they do not meet the Tier 1 credit requirement and 2) Touring bikes are
strong sellers regardless. While our dealer contacts have been happy that some financing incentives are available and they have
helped them work down MY15 inventory to more comfortable levels.
The main issue dealers are facing now continues to be weak sales in most of the non-Touring models. According to dealers, this has
been caused by a number of things including competitive discounting, popular new models from other manufacturers (such as the
Indian Scout) and low trade-in and resale values on used bikes.
Throughout 3Q, we saw incentives being advertised that were similar to previous quarters with various financing incentives and
rebates, including up to $3,000 off of certain Honda models, up to $1,250 off of certain BMW models and up to $1,750 off some Star
Motorcycle models. Indian motorcycle is also offering $1,500 credit towards accessories and apparel with the purchase of a 2015
Chief or Chieftain as well as $0 down on all models and a five year warranty on all 2015 models, excluding the Scout, which gets a
two year warranty.
While Harley-Davidson does not discount bikes directly in order to protect the premium brand, the majority of HOG dealers have
been selling bikes below MSRP for some time in an effort to close the pricing gap between competing bikes, whether they be from
other manufacturers or used Harleys. Unfortunately for our dealers, but a good thing for Harley’s premium brand, Harley does not
allow dealers to advertise prices below MSRP. Therefore, many buyers are unaware of their availability.
Inventory Levels Near Ideal in Early Stages of MY16 Launch
Following the model year changeover, which began in late August with the announcement of MY2016 bikes, our dealer contacts
were reporting that their inventory was slightly below ideal levels, with many looking for more of the most in demand 2016 models. In
our most recent survey dealer inventory was at ideal levels. As usual there are some dealers who have seen sales slip and report
inventory being too high, while others will take as many new model bikes as they can get.
Shortages immediately after a new model launch do not come as a surprise, but this is about as close as inventory has been to our
contacts’ ideal levels after a new model launch in years. This can largely be attributed to the work HOG has done to streamline the
rollout of new bikes.
James Hardiman, CFA CPA (212) 833-1362
Harley-Davidson, Inc. | 3
Lowering 3Q by a Nickel (Again); In line with 3Q Mean; Well Short of 4Q Mean; FY15 Guide Becomes More
Difficult with Each Passing Month
Surprisingly, following a disappointing 2Q print, full-year shipment guidance was unchanged at 276-281K, an increase of 2-4%
versus last year’s 271K despite a 1H15 retail decline of 1.4% and more difficult retail comparisons during the back half of the year.
Nonetheless, this still requires a significant acceleration in back-half retail. Importantly, whereas we would have anticipated
management backing off of its expectation to grow retail inventories, management expects to grow U.S. inventories commensurate
with retail growth, and international inventories commensurate with the dealer growth overseas. Of course, U.S. retail sales were
actually down through the first half, although management still expects to see growth this year.
Fundamentally, our math would suggest that the company would need to deliver 7.5%+ retail growth in the back half of the year just
to achieve the lower end of the guidance in a flat inventory scenario, and 6.5%+ retail growth if we assume a moderate (2K) increase
in inventory for the year. While we believe any inventory build in such an anemic retail growth environment is the wrong move,
management expects to grow U.S. inventories commensurate with retail growth, and international inventories commensurate with
the dealer growth overseas. In either case, we will need a material retail acceleration to achieve the low end of guidance.
That said, 3Q shipment guidance was initiated in a range of 54K to 59K, or growth of 7-16% vs. last year’s 51K. The company has
an exceedingly easy shipment comparison during 3Q15, given the fact that the company’s shipments were down 6% during 2Q vs.
the 4% retail increase as the company working down inventory surpluses coming out of 2Q14. From a unit perspective, the
company retailed 73K bikes in 3Q14 and only shipped 51K bikes, for a channel inventory reduction of 23K bikes, significantly greater
than what should have seasonally been closer to 10-15K units.
In other words, given the inventory dynamic, the 3Q guidance is very much achievable even under a low-single-digit retail
environment. The implied guidance for 4Q, however, is for shipments of 52-62K (11-33%, or 22% growth at the midpoint). This
seems particularly difficult, especially if the company is not able to exceed the meager guidance for 3Q.
Based on the lackluster September to punctuate an underwhelming 3Q, we are lowering our 3Q EPS estimates for the second time
in the past two months, this time by a nickel to $0.79, consisting of a reduction to our domestic retail assumption from 4% to 1.5%
and a commensurate reduction in our gross margin assumption. This now puts us in line with the consensus estimate for 3Q, in that
although our retail and gross margin assumptions are short of the street, we believe the Street is underappreciating the benefit the
company gets from a more normalized wholesale/retail relationship versus last year’s 3Q inventory drawdown.
Our full-year shipment estimate of 270 falls short of management’s guidance of 276-281K. Clearly, if our 3Q retail estimates are
even close to reality, we would need to see a herculean retail effort in 4Q to achieve the full year guide in the absence of sizeable
inventory increases to finish the year. Sequentially, we have a tough time not getting to within the 3Q shipment guidance (we are
currently modeling 55K units vs. the guidance of 54-59K) while the 4Q guidance seems somewhat aggressive (we are currently
modeling 50K units vs. the implied 52-62K). Our 2015 EPS estimate of $3.90 is $0.12 beneath the Street, whereas our 2016
estimate of $4.61 (down $0.07) is $0.04 ahead of the Street.
As shown below, while we are well beneath the Street for the year, we are weighting our 2H earnings estimates much more towards
3Q relative to 4Q.
Figure 3: Wedbush vs. Street
Wedbush
3Q15
4Q15
2015
2016
Consensus
Retail
Growth
Shipments
('000)
Gross
Margin %
SG&A ($)
EPS
Retail
Growth
Shipments
('000)
Gross
Margin %
SG&A
($)
EPS
1.5%
3.2%
0.2%
3.4%
55
50
270
277
35.1%
30.3%
36.5%
36.9%
$254
$280
$1,046
$1,054
$0.79
$0.40
$3.90
$4.61
4.1%
5.9%
1.3%
4.4%
56
55
276
286
35.1%
32.0%
36.8%
37.0%
$258
$283
$1,052
$1,071
$0.79
$0.49
$4.02
$4.57
Source: Company data, Wedbush Securities, Inc.
James Hardiman, CFA CPA (212) 833-1362
Harley-Davidson, Inc. | 4
Valuation
Our price target of $57 is based on a 12x multiple on our FY16 estimate. This is a discount to 15-Year (20x), 10-Year (16x), and 5Year (17x) year-forward averages. The direction of the company and by extension the stock is as uncertain as ever. 3Q has done
little to add clarity to the story going forward, and so in the absence of any reliable catalyst for retail improvement, we are maintaining
our NEUTRAL rating and $57 price target.
Risks to the Attainment of Our Price Target
Potential risks to our investment thesis, rating, 12-month price target and estimates include, but are not limited to:
Although the motorcycle industry cannot be said to have the long-term growth dynamics that it once did, we believe that a certain
level of eventual economic recovery is currently built into the stock. If this recovery does not materialize or, worse yet, we slip back
into a double-dip recession, our earnings estimates could suffer, as could the multiple currently placed on the stock.
From a long-term perspective, we believe HOG must continue to make strides with its non-core customers and in its non-core
markets. Middle-aged white American males, a group that is expected to contract somewhat over the course of the next decade,
currently represents HOG’s core customer. Our analysis of population projections and buying patterns, however, suggests that this is
far from a concern over the next handful of years, and if any of the company’s outreach initiatives take hold (which some of them
appear to have done), the aging of the population should ultimately be seen as a long-term non-factor for HOG.
Covered Public Companies Mentioned in this Report (priced 10/16/15):
COMPANY
TICKER
RATING
PRICE
PRICE TARGET
Polaris Industries Inc.
PII
OUTPERFORM
$122.16
$160
James Hardiman, CFA CPA (212) 833-1362
Harley-Davidson, Inc. | 5
Figure 4: Selected September Survey Quotes
On Demand:
“Had a pretty slow quarter. Down about 10% throughout. Not sure what is causing it other than maybe the economy.” – HarleyDavidson Dealer, Midwest
“Flat for the quarter. July and August were pretty good months for us, but traffic for the new models has been down vs. last year.” –
Harley-Davidson Dealer, East
“We were up about 15% for the quarter. We are having to make some deals to move a few less popular models, but we aren’t the
only ones doing that. Obviously we can’t advertise those deals though, so sometimes customers don’t know they can get them.” –
Harley-Davidson Dealer, South
“Used bikes are selling much better than new right now. We were almost even with last year on new bikes, but used were up 10-15%
for us.” – Harley-Davidson Dealer, Midwest
On Inventory:
“I am pretty comfortable with where we are. We are getting less supplemental bikes than usual, but right now I am OK not carrying
the extra inventory.” – Harley-Davidson Dealer, East
“Light on some new models that I’d like to move more of but nothing crazy.” – Harley-Davidson Dealer, South
“Too much carryover. We had a rough quarter so we have a lot still sitting here that I need to work through.” – Harley-Davidson
Dealer, Midwest
Other Interesting Quotes:
“The Road Glide Ultra has been doing great. This is the Road Glide these guys have been waiting for.” – Harley-Davidson Dealer,
South
“The S model SOftails are the only new non-touring that we are selling any of. The rest are still soft.” – Harley-Davidson Dealer,
West
“I think they should have made the S model changes to all of the Softails instead of just these two models. They will have to
eventually to spark the line.” – Harley-Davidson Dealer, East
Source: Wedbush Securities, Inc.
James Hardiman, CFA CPA (212) 833-1362
Harley-Davidson, Inc. | 6
Figure 5: HOG Quarterly Income Statement
Harley-Davidson Income Statement
($Millions)
1Q13
1Q14
1Q15
1Q16E
2Q13
2Q14
2Q15
2Q16E
3Q13
3Q14
3Q15E
3Q16E
4Q13
4Q14
4Q15E
4Q16E
Net Sales
% growth
Cost of goods
Gross profit
gross profit %
SG&A
% of sales
Motorcycle Operating Income
% of sales
Corporate expense
HDFS operating profit/(loss)
% change y/y
EBIT
% of sales
Interest income & Other
Interest expense
Pretax income
Provision for income tax
Tax rate
Net income
EPS (GAAP - from continuing ops)
EPS (Pro Forma)
Diluted shares
$1,414
11%
$895
$519
36.7%
$240
16.95%
$280
19.8%
$1,572
11%
$980
$592
37.7%
$244
15.55%
$348
22.1%
$1,511
-4%
$920
$590
39.1%
$245
16.21%
$345
22.9%
$1,429
-5%
$885
$545
38.1%
$240
16.8%
$305
21.3%
$1,631
4.0%
$1,030
$601.9
36.9%
$250
15.3%
$352
21.6%
$1,834
12.4%
$1,110
$724
39.5%
$251
13.7%
$473
25.8%
$1,651
-10.0%
$1,004
$647
39.2%
$267
16.2%
$381
23.1%
$1,715
4%
$1,032
$683
39.8%
$270
15.7%
$413
24.1%
$1,180
8%
$764
$416.32
35.3%
$240
20.4%
$176
14.9%
$1,131
-4%
$736
$394.60
34.9%
$248
22.0%
$146
12.9%
$1,176
4%
$763
$413
35.1%
$254
21.6%
$158
13.5%
$1,351
15%
$844
$507
37.5%
$266
19.7%
$241
17.9%
$1,032
2%
$708
$324.745
31.46%
$264
25.6%
$60
5.8%
$1,031
0%
$717
$314.210
30.47%
$278
27.0%
$36
3.5%
$1,051
2%
$733
$319
30.3%
$280
26.6%
$39
3.7%
$1,039
-1%
$733
$306
29.4%
$279
26.8%
$27
2.6%
$72
6%
$351
25%
$2
($11)
$341
$115
34%
$226
$0.99
$1.00
226.1
$63
-12%
$411
26%
$2
($4)
$409
$143
35.0%
$266
$1.21
$1.21
220.5
$65
2%
$410
27%
$1
($0)
$411
$142
34.4%
$270
$1.27
$1.27
211.8
$65
0%
$369
26%
$1
($5)
$366
$126
34%
$240
$1.30
$1.30
185
$74
-10%
$427
26%
$2
($11)
$417
$149
36%
$268
$1.21
$1.20
224
$74
0%
$548
30%
$2
($0)
$549
$195
35%
$354
$1.62
$1.62
219
$82
10%
$463
28%
$1
($0)
$464
$164
35%
$300
$1.44
$1.44
209
$82
0%
$495
29%
$1
($5)
$492
$174
35%
$318
$1.75
$1.75
182
$76
5%
$252
21%
$1
($11)
$242
$79
32%
$163
$0.73
$0.73
223
$78
2%
$224
20%
$2
($0)
$226
$75
33%
$150
$0.69
$0.69
217
$82
5%
$240
20%
$1
($5)
$237
$79
33%
$158
$0.79
$0.79
199
$82
0%
$323
24%
$1
($5)
$320
$107
33%
$213
$1.19
$1.19
179
$61
-3%
$122
12%
$1
($11)
$112
$37
33%
$75
$0.34
$0.34
222
$62
2%
$98
10%
$2
($0)
$100
$25
25%
$74
$0.35
$0.35
214
$66
5%
$104
10%
$1
($5)
$101
$26
26.0%
$75
$0.40
$0.40
188
$66
0%
$92
9%
$1
($5)
$89
$23
26%
$66
$0.38
$0.38
175
EBITDA
per share
Dividends Paid
per share
$394
$1.74
$47
$0.21
$454
$2.06
$61
$0.28
$453
$2.14
$58
$0.28
$412
$2.23
$51
$0.28
$467
$2.08
$47
$0.21
$591
$2.70
$60
$0.28
$556
$2.66
$57
$0.28
$589
$3.23
$50
$0.28
$291
$1.30
$47
$0.21
$268
$1.23
$60
$0.28
$284
$1.43
$55
$0.28
$367
$2.05
$49
$0.28
$191
$0.86
$47
$0.21
$173
$0.81
$59
$0.28
$153
$0.81
$52
$0.28
$141
$0.81
$48
$0.28
Source: Company data, Wedbush Securities, Inc.
James Hardiman, CFA CPA (212) 833-1362
Harley-Davidson, Inc. | 7
Figure 6: HOG Income Statement
Harley-Davidson Income Statement
($Millions)
2014
2015E
2016E
Net Sales
% growth
Cost of goods
Gross profit
gross profit %
SG&A
% of sales
Motorcycle Operating Income
% of sales
Corporate expense
HDFS operating profit/(loss)
% change y/y
EBIT
% of sales
Interest income & Other
Interest expense
Pretax income
Provision for income tax
Tax rate
Net income
EPS (GAAP - from continuing ops)
EPS (Pro Forma)
Diluted shares
5,578
-3%
3,647
1,931
34.6%
$942
16.9%
$989
17.7%
$83
-61%
$1,072
19%
$11
($5)
$1,078
$386
35.8%
$692
$2.92
$2.95
234
2008
4,287
-23%
2,901
1,386
32.3%
$832
19.4%
$554
12.9%
($86)
-204%
$468
11%
$4
($22)
$450
$177
39.3%
$273
$0.30
$1.18
233
2009
4,177
-3%
2,745
1,431
34.3%
$870
20.8%
$561
13.4%
$182
-311%
$743
18%
$5
($90)
$658
$212
34.2%
$446
$1.11
$1.90
235
2010
4,662
12%
3,106
1,556
33.4%
$927
19.9%
$629
13.5%
$269
48%
$898
19%
$8
($45)
$861
$266
31.0%
$594
$2.33
$2.53
235
2011
4,943
6%
3,222
1,720
34.8%
$976
19.8%
$744
15.1%
$285
6%
$1,029
21%
$7
($46)
$990
$345
34.8%
$645
$2.71
$2.81
230
2012
5,258
6%
3,396
1,862
35.4%
$994
18.9%
$868
16.5%
$283
-1%
$1,152
22%
$6
($45)
$1,112
$379
34.1%
$733
$3.27
$3.26
225
2013
5,568
6%
3,543
2,025
36.37%
$1,022
18.4%
$1,003
18.0%
$278
-2%
$1,281
23%
$6
($4)
$1,283
$439
34.2%
$845
$3.86
$3.86
219
5,388
-3.2%
$3,420
1,969
36.54%
$1,046
19.4%
$923
17.1%
5,535
2.7%
$3,494
2,040
36.86%
$1,054
19.0%
$986
17.8%
$294
6%
$1,217
23%
$6
($10)
$1,213
$411
33.9%
$802
$3.90
$3.90
206
$294
0%
$1,280
23%
$6
($19)
$1,266
$430
34.0%
$836
$4.61
$4.61
182
EBITDA
per share
Dividends Paid
per share
$1,294
$5.52
$302
$1.29
$714
$3.07
$94
$0.40
$1,105
$4.71
$94
$0.40
$1,168
$4.97
$111
$0.47
$1,286
$5.59
$142
$0.62
$1,414
$6.30
$188
$0.84
$1,563
$7.14
$238
$1.09
$1,549
$7.53
$229
$1.11
$1,613
$8.88
$198
$1.09
-
-
Source: Company data, Wedbush Securities, Inc.
James Hardiman, CFA CPA (212) 833-1362
Harley-Davidson, Inc. | 8
Figure 7: HOG Balance Sheet
($Millions)
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
$594
$0
$296
$2,444
$1,378
$1,630
$40
$269
$0
$1,436
$1,527
$153
$219
$0
$1,169
$592
$418
$0
$230
$235
$1,068
$136
$230
$0
$1,273
$470
$394
$0
$188
$293
$1,067
$99
$261
$0
$1,421
$353
$425
$0
$145
$219
$907
$57
$248
$0
$1,604
$313
$449
$0
$99
$272
$582
$53
$252
$2
$2,332
$0
$363
$2
$137
$278
$1,086
$53
$250
$2
$2,332
$0
$401
$2
$137
$274
ASSETS
Current Assets
Cash
Marketable Securities
A/R
Finance Receivables Held for Sale
Finance Receivables
$265
$462
$1,022
$140
$262
$0
$1,080
$699
$326
$0
$289
$247
$5,378
$4,342
$4,067
$4,542
$4,051
$3,989
$3,948
$4,000
$4,536
$817
$3,621
$1,754
$2,272
$809
$0
$29
$267
$0
$2,407
$1,631
$815
$0
$30
$236
$0
$3,044
$1,181
$842
$245
$30
$73
$0
$3,402
$1,114
$883
$0
$28
$153
$0
$4,817
$0
$949
$2
$26
$153
$0
$4,817
$0
$965
$2
$26
$153
$0
Restricted finance receivables held by variable interest entities
$401
Inventories
Assets of discontinued operations
$323
$181
Restricted cash
Prepaid Expenses and other
Total Current Assets
Finance Receivables Held for sale
$1,094
$0
$139
$401
$0
$907
$0
$31
$254
$0
$1,554
$2,684
$815
$0
$30
$281
$0
$7,829
$9,156
$9,431
$9,674
$9,171
$9,405
$9,528
$9,946
$10,499
A/P
$324
$163
$225
$256
$257
$240
$197
$159
$176
Accrued expenses
$541
$514
$567
$564
$514
$427
$449
$458
$453
$70
$0
$0
$0
$0
$0
$2
$2
$0
$190
$480
$838
$295
$666
$732
$115
$115
$1,739
$1,332
$1,551
Finance Receivables Held for investment
Restricted finance receivables held by variable interest entities
Property, plant & equipment
Prepaid Pension Costs
Goodwill
Other assets
Net Assets from discontinued ops.
Total Assets
LIABILITIES
Current liabilities
Liabilities of discontinued operations
Short Term Debt
Current portion of finance debt
Current portion of long-term debt held by variable interest entities
$0
Total Current liabilities
Finance debt
$2,604
$2,268
$2,176
$4,114
Finance debt held by Variable interest entities
Deferred income taxes
$0
$400
$38
$0
$644
$1,551
$751
$640
$399
$1,176
$367
$0
$0
$2,024
$2,699
$1,503
$2,510
$2,389
$2,286
$2,297
$4,560
$2,517
$2,397
$3,322
$3,417
$2,857
$4,560
$2,004
$1,447
$1,048
$0
$905
$0
$0
$49
$0
$0
$0
$0
$0
$0
$0
$0
Pension Liability
$484
$245
$282
$302
$330
$36
$76
$67
$67
Postretirement benefits
$274
$264
$255
$269
$278
$216
$203
$196
$196
Other Long-Term Liabilities
Total Liabilities
$175
$155
$153
$140
$131
$167
$189
$195
$195
$5,713
$7,047
$7,234
$7,254
$6,613
$6,396
$6,619
$7,304
$7,316
Total shareholder's equity
$2,116
$2,108
$2,197
$2,420
$2,558
$3,009
$2,909
$2,642
$3,183
TOTAL LIAB. & EQUITY
$7,829
$9,156
$9,431
$9,674
$9,171
$9,405
$9,528
$9,946
$10,499
Source: Company data, Wedbush Securities, Inc.
James Hardiman, CFA CPA (212) 833-1362
Harley-Davidson, Inc. | 9
Figure 8: HOG Cash Flow Statement
HARLEY-DAVIDSO N YEAR TO DATE CASH FLO W
($Millions)
2009
2010
2011
2012
2013
2014
($55)
Depreciation
$246
Amort of deferred loan origination costs
$0
Amort of financing origination fees
$0
Provision for Long-term benefits
$118
Contributions to pension and postretirement plans ($233)
Stock Compensation Expense
$18
Net Change in wholesale finance receivables
$332
Provision for credit losses
$169
$147
$255
$87
$20
$80
($39)
$30
$82
$93
$599
$180
$79
$11
$59
($220)
$38
($2)
$17
$624
$169
$79
$10
$71
($244)
$41
$3
$22
$734
$167
$86
$9
$67
($205)
$41
$29
$60
$845
$179
$94
$8
$34
($30)
$38
($75)
$81
($18)
($21)
$97
$0
$3
$10
$3
$215
$88
$11
($16)
$0
$43
$5
($95)
$120
$128
$10
($7)
$0
($14)
($0)
$21
($11)
$53
$16
$10
$0
($37)
($0)
($46)
($54)
($8)
$22
($1)
$0
($10)
($3)
($51)
$19
$3
$82
$337
$885
($189)
($2,622)
$2,760
($143)
$130
$0
($64)
$447
$1,083
($1,755)
($59)
$238
($0)
$59
($111)
($225)
$6
$8
($309)
($8)
($98)
($114)
$178
$801
($189)
($2,859)
$2,768
($5)
$23
$0
($261)
$994
$764
($1,406)
($421)
($745)
$176
$42
($142)
($312)
$13
$46
($990)
($9)
$69
($96)
$243
$977
($208)
($3,244)
$2,832
($5)
$40
$16
($569)
$0
$648
($840)
($28)
$371
$10
$43
($188)
($479)
$20
$51
($393)
($17)
($3)
($45)
$302
$1,147
($232)
($3,568)
$3,013
$0
$41
$2
($745)
$992
$847
($835)
($526)
$64
$7
$23
($238)
($616)
$12
$38
($536)
($26)
$505
($459)
($2)
($160)
Net Income
Loss on debt extinguishment
Deferred Income T axes
$7
($22)
Other, net
$76
Changes in current assets and liabilities:
$0
Account receivable, net
$9
Finance receivables - accrued interest and other ($3)
Inventories
$85
Accounts Payable and accrued liabilities
($239)
Foreign Currency adjustments
Restructuring reserves
Derivative instruments
Other
$101
$3
($47)
$207
T otal Adjustments
$538
$904
Cash Flow from O pe rations
$609
$1,163
Capital expenditures
($117)
($171)
Origination of finance receivables held for investment
($1,378)
($2,253)
Collections on finance receivables held for investment
$607
$2,669
Purchase of marketable securities
($40)
($184)
Sales and redemptions of marketable securities
$0
$84
Other, net
$3
$0
Cash Flow from Inve sting
($863)
$145
Proceeds from medium-term notes
$497
$0
Proceeds from securitization debt
$2,413
$598
Repayments of securitization debt
($263)
($1,897)
Repayment of medium-term notes
$0
($200)
Increase (Decrease) in credit facilities and unsecured
commercial paper
($1,083)
$31
Net borrowings of asset-backed commercial paper ($513)
($1)
Net change in restricted cash
($168)
$78
Dividends
($94)
($94)
Share Repurchases
($2)
($2)
Excess tax benefits from share repurchases
$0
$4
Issuance of common stock under employee stock option
$0 plans $8
Cash Flow from Financing
$1,382
($1,856)
Exchange Rate Impact
$7
$5
T otal Changes in current assets and Liabilities
Change in Cash (continuing ops)
$1,134
($542)
Source: Company data, Wedbush Securities, Inc.
James Hardiman, CFA CPA (212) 833-1362
Harley-Davidson, Inc. | 10
Analyst Biography
James has followed the Consumer space for 12 years, spanning the coverage of 10+ industries and 50+ stocks, but focusing more
recently on the Leisure space (Powersports, Amusement Parks, Cruise Lines, Toys, and Video Games) for 9+ years. Prior to joining
Wedbush, James covered the Leisure space at Longbow Research and Midwest Research. James holds an M.B.A. from the Darden
School of Business and a B.S. in Systems Engineering from the University of Virginia. Prior to business school, James was a
management consultant at PricewaterhouseCoopers. James is also a CFA charter holder and a Certified Public Accountant (CPA).
James has spent close to a decade cultivating relationships with dealers, store associates, travel agents, and consumers in the Leisure
space. Using these relationships, he conducts monthly/quarterly channel check which in turn inform his earnings models as well as his
long-term outlook on covered companies.
Analyst Certification
I, James Hardiman, CFA CPA, Sean Wagner, certify that the views expressed in this report accurately reflect my personal opinion and that I
have not and will not, directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views
contained in this report.
Disclosure information regarding historical ratings and price targets is available at http://www.wedbush.com/ResearchDisclosure/DisclosureQ315.pdf
Investment Rating System:
Outperform: Expect the total return of the stock to outperform relative to the median total return of the analyst’s (or the analyst’s team) coverage
universe over the next 6-12 months.
Neutral: Expect the total return of the stock to perform in-line with the median total return of the analyst’s (or the analyst’s team) coverage
universe over the next 6-12 months.
Underperform: Expect the total return of the stock to underperform relative to the median total return of the analyst’s (or the analyst’s team)
coverage universe over the next 6-12 months.
The Investment Ratings are based on the expected performance of a stock (based on anticipated total return to price target) relative to the
other stocks in the analyst’s coverage universe (or the analyst’s team coverage).*
Rating Distribution
(as of September 30, 2015)
Outperform: 55%
Neutral: 43%
Underperform: 2%
Investment Banking Relationships
(as of September 30, 2015)
Outperform:24%
Neutral: 3%
Underperform: 0%
The Distribution of Ratings is required by FINRA rules; however, WS’ stock ratings of Outperform, Neutral, and Underperform most closely
conform to Buy, Hold, and Sell, respectively. Please note, however, the definitions are not the same as WS’ stock ratings are on a relative
basis.
The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity. The
analysts receive compensation that is based upon various factors including WS’ total revenues, a portion of which are generated by WS’
investment banking activities.
Wedbush Equity Research Disclosures as of October 19, 2015
Company
Disclosure
Harley-Davidson, Inc.
Polaris Industries
1
1
Research Disclosure Legend
1.
WS makes a market in the securities of the subject company.
2.
WS managed a public offering of securities within the last 12 months.
3.
WS co-managed a public offering of securities within the last 12 months.
4.
WS has received compensation for investment banking services within the last 12 months.
5.
WS provided investment banking services within the last 12 months.
6.
WS is acting as financial advisor.
7.
WS expects to receive compensation for investment banking services within the next 3 months.
8.
WS provided non-investment banking securities-related services within the past 12 months.
9.
WS has received compensation for products and services other than investment banking services within the past 12 months.
10. The research analyst, a member of the research analyst’s household, any associate of the research analyst, or any individual
directly involved in the preparation of this report has a long position in the common stocks.
11. WS or one of its affiliates beneficially own 1% or more of the common equity securities.
James Hardiman, CFA CPA (212) 833-1362
Harley-Davidson, Inc. | 11
12.
The analyst maintains Contingent Value Rights that enables him/her to receive payments of cash upon the company’s meeting
certain clinical and regulatory milestones.
Price Charts
Wedbush disclosure price charts are updated within the first fifteen days of each new calendar quarter per FINRA regulations. Price charts for
companies initiated upon in the current quarter, and rating and target price changes occurring in the current quarter, will not be displayed until
the following quarter. Additional information on recommended securities is available on request.
* WS changed its rating system from (Strong Buy/Buy/Hold/Sell) to (Outperform/ Neutral/Underperform) on July 14, 2009.
Please access the attached hyperlink for WS’ Coverage Universe: http://www.wedbush.com/services/cmg/equities-division/research/equityresearch Applicable disclosure information is also available upon request by contacting Noeth Hing in the Research Department at (212) 9389925, by email to noeth.hing@wedbush.com, or the Business Conduct Department at (213) 688-8090. You may also submit a written request
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RESEARCH DEPT. * (212) 938-9925 * www.wedbush.com
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CORPORATE HEADQUARTERS (213) 688-8000
The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information contained herein is not a
representation by this corporation, nor is any recommendation made herein based on any privileged information. This information is not intended to be
nor should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any security mentioned
herein. This firm, Wedbush Securities, its officers, employees, and members of their families, or any one or more of them, and its discretionary and
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thereof in the open market or otherwise. The information and expressions of opinion contained herein are subject to change without further notice. The
James Hardiman, CFA CPA (212) 833-1362
Harley-Davidson, Inc. | 12
herein mentioned securities may be sold to or bought from customers on a principal basis by this firm. Additional information with respect to the
information contained herein may be obtained upon request.
James Hardiman, CFA CPA (212) 833-1362
Harley-Davidson, Inc. | 13
EQUITY RESEARCH DEPARTMENT
DIRECTOR OF RESEARCH
Mark D. Benson (213) 688-4435
RETAIL AND CONSUMER
Healthy Lifestyles
Phil Terpolilli
Dominic Ruccella
(212) 833-1367
(212) 833-1375
Leisure
James Hardiman, CFA CPA
Sean Wagner
(212) 833-1362
(212) 833-1363
Restaurants
Nick Setyan
Colin Radke
(213) 688-4519
(213) 688-6624
Specialty Retail: Hardlines
Seth Basham, CFA
(212) 938-9954
John Garrett, CFA
(213) 688-4523
Specialty Retail: Softlines
Morry Brown, CFA
Taryn Kuida
(213) 688-4311
(213) 688-4505
RETAIL CHANNEL CHECKING GROUP
Lupine Skelly
(505) 417-5427
INDUSTRIAL GROWTH TECHNOLOGY
Environmental Services / Building Products
Al Kaschalk
(213) 688-4539
Water and Renewable Energy Solutions
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(213) 688-4319
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(213) 688-4380
EQUITY SALES
Los Angeles
San Francisco
New York
Boston
Minneapolis
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TECHNOLOGY, INTERNET, MEDIA & SOCIAL MEDIA
HEALTHCARE
Enterprise Software
Steve Koenig
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(415) 274-6801
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David M. Nierengarten, Ph.D.
(415) 274-6862
Dilip Joseph
(415) 273-7308
Robert Driscoll, Ph.D.
(415) 274-6863
Entertainment: Retail
Michael Pachter
Alicia Reese
Nick McKay
(213) 688-4474
(212) 938-9927
(213) 688-4343
Heather Behanna, Ph.D.
(415) 274-6874
Emerging Pharmaceuticals
Liana Moussatos, Ph.D.
Kelechi Chikere, Ph.D.
(415) 263-6626
(415) 273-7304
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Michael Pachter
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(213) 688-4474
(213) 688-4343
Financial Technology
Gil B. Luria
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(213) 688-4501
(213) 688-4429
Medical Devices
Tao Levy
Matthew Won
Internet: Media and Gaming
Michael Pachter
Nick McKay
Alicia Reese
(213) 688-4474
(213) 688-4343
(212) 938-9927
Medical Diagnostics and Life Sciences Tools
Zarak Khurshid
(415) 274-6823
Healthcare Services - Managed Care & Hospitals
Sarah James
(213) 688-4503
Internet: Social Media, Advertising and Technology
Michael Pachter
(213) 688-4474
Nick McKay
(213) 688-4343
Alicia Reese
(212) 938-9927
Media
James Dix, CFA
Aria Ertefaie
(213) 688-4315
(212) 938-9958
Movies and Entertainment
Michael Pachter
Alicia Reese
Nick McKay
(213) 688-4474
(212) 938-9927
(213) 688-4343
Semiconductors
Betsy Van Hees
(415) 274-6869
(213) 688-4470 / (800) 444-8076
(415) 274-6800
(212) 938-9931
(617) 832-3700
(213) 688-6671
(213) 688-4418
EQUITY TRADING
Los Angeles
San Francisco
New York
Boston
Milwaukee
CORPORATE HEADQUARTERS
1000 Wilshire Blvd., Los Angeles, CA 90017-2465
Tel: (213) 688-8000 www.wedbush.com
(213) 688-4470 / (800) 421-0178
(415) 274-6811
(212) 344-2382
(617) 832-3700
(213) 688-4475
(212) 938-9948
(212) 938-9953