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Founded in 1903 in Milwaukee, Wisconsin, Harley-Davidson (HOG) operates in two segments: Motorcycles & Related Products and Financial Services. The former segment designs, manufactures, and sells at wholesale on-road Harley-Davidson motorcycles as well as parts, accessories, merchandise, and related services. The latter segment provides wholesale and retail financing and insurance-related programs to HD dealers and their retail consumers.

Original Thesis

We initiated research on HOG in September 2020 due to Chairman, CEO, & President Jochen Zeitz buying shares on the open market shortly after taking office in February 2020.

He made two purchases in May 2020; once on May 8 (97,850 shares at $21.26, totaling just over $2 million), and again on May 13 (51,020 shares at $19.52, totaling just shy of $1 million and representing a 51% increase to his holdings).

These were his first purchases of HOG stock, and he made another purchase on Aug. 12 – this time buying 71,450 shares at $27.86 (again spending about $2 million, representing a further 47% increase to his holdings) at a significantly higher level than his previous buys.

Developments

As of April 2021, HOG beat expectations in Q1FY21 compared to a soft Q4FY20. Clearly, the company's strategic focus on and exit from 39 low-volume and low-profitability markets as part of The Rewire and The Hardwire restructuring initiatives (2021-2025) are working seamlessly. HOG streamlined its US dealer networks and now has volume growth of 30% in North America compared to Q1FY20. We expect this growth to continue, driving HOG’s revenues in the near- to medium-term.

HOG expects motorcycle revenue growth of 30% to 35% (compared to 20% to 25% in prior guidance) and operating margins between 7% to 9% (compared to the prior 5% to 7%) in FY21E.

However, the unfavorable EU ruling (EU accounts for 10% of total motorcycles sold by volume in Q1FY21), along with the potential for HOG’s motorcycles in the region receiving a tariff of 56% up from the current 6%, puts its overall operating margins back to the 5% to 7% range.

We believe the EU decision is unprecedentedly high, and HOG has launched an immediate challenge. We believe there is a high chance the EU decision will be overturned just like two years ago when the EU put 30% tariffs on HOG motorcycles and the company won a BOI ruling that allowed them to keep the tariff at 6%.

Additionally, HOG is actively focusing on e-bikes, which is where we see a Spinoff or partial sale opportunity for its eBicycles business in the long-term. We see this move has the potential to raise capital for HOG to go toward debt repayment.

Also, in the last quarter, HOG unveiled an employee stock program similar to PE player KKR & Co. (KKR) for its 4,500 employees, aligning all employee compensation to stock performance. This initiative is the first of its kind for any automaker in the world, and a major positive for company culture.

Recommendation

The stock, selected as a Top Pick at the start of 2021, is up 31% year-to-date. HOG is a strong buy at current levels with +31% upside on a Bull case scenario.