American Motorcycle Dealer AMD 225 April 2018 | Page 4

Shark Bait II – The Sequel
s this edition went to press, the fall-out from the debate
about Harley’s leadership, the dissatisfaction and churn in
the dealer network, the soft share price and Harley’s
increasingly exposed spend on dividends, the
controversial share buyback programs and the uncertainty about
new model policy continue to reverberate around a nervous market.
Common sense, logic and necessity dictate that this summer’s MY 2019
announcement must, surely, please to goodness, see a fairly substantial rabbit
pulled from Milwaukee’s bag if it is to keep pace with its “100 new models in
10 years” pledge and sustain the momentum created by the 2018 Softails and
2017’s M-8 Tourers.
The problem is that way more people than ever, and well informed, experienced
and “connected” observers at that, are saying they hope the E-bikes-in-2019
plan (one apparently reinforced by last month’s Alta Motors investment) turns
out to be a smoke screen to deflect attention from impending news this
summer, then we are now, more than ever, in a place
where the normal rules of sense and logic are
suspended.
As one authorized Harley dealer put it to me recently,
if there were a plan then sure, changing leadership at
this time would be folly, “but as far as many of us can
determine, the only plan is to, at some stage, devise
a plan.”
ith over $5 bn of capital (some of it borrowed),
tied up in share buybacks which are mostly worth less than was paid
given the present share price, against a current reduced market cap of around
$7.5 bn, it has been said that where Harley’s vulnerability is concerned, “Shark
Bait” (see AMD March*) simply doesn’t do the extent of Harley’s potential
difficulties justice.
Interestingly, with Polaris shares trading at around the $120 mark, Matt
Levatich’s once dismissive shot across their competitors’ bow as being half the
company that Harley is, looks a little hollow now - Polaris Industries’ current
market cap is $7.22 bn and heading north as Harley’s continues south.
Harley has again increased its dividend for the first quarter of 2018 ($0.370
up from $0.365). If it follows its own form book, then that sets the level now
for the year as a whole, resulting in an annual dividend of $1.48. That may be
only modestly up from the $1.46 paid out in 2017, it is up again nonetheless
– but can they afford it?
In fact, taken over the five full years from 2013 to 2017, Harley’s annual
dividend growth rate has been 18.68 percent, during a timescale in which
revenues have only grown by 0.24 percent. Meanwhile senior executives
continue to divest themselves of tranches of personal share holdings.
The company still appears to have a relatively healthy 2017 EBIT (given the
circumstances) of $891.26 m, which is 18.13 percent of the $4,915.027 bn of
the motorcycle and related products revenues achieved.
However, in a final quarter that saw the new Softails come on stream and
included a full impact M-8 Touring platform cycle, revenue of $1047.045 bn
A
only produced an EBIT of $101.26, - 9.67 percent on a matching revenue basis.
If Harley’s game-plan is to go private, then, like many I have discussed this with,
I applaud the ambition. But can they afford it?
Doing so appears to be the only viable explanation for yet another new share
buyback authorization - a further 15 m shares, while some 10 m still open from
the February 2017 authorization. Harley has now reduced its outstanding
common stock from around the 260 m mark to approximately 160 m in
something like three or four years.
o not be prioritizing creative incentive packages to shift the new metal is to
fly in the face of conventional capitalist wisdom. Whilst Harley is to be
applauded for resisting the temptation to discount, incentives are not the same
as discounts if based on list price. Incentives are a common-sense response to
softening demand and a prime weapon in the locker of defending brand status,
not diluting it.
Harley’s dealers are as much invested in the demand for Milwaukee’s metal as
the factory and shareholders are, and to not be
plowing as much budget as possible into recognizing
that, and to not be working with their dealers to
weather that storm is, in my humble opinion, an
abrogation of the responsibility that all
manufacturers have to their independent dealer
networks.
After all, if its traditionally a good enough strategy
for ‘Detroit’ and pretty much all other brands (premium
or otherwise), isn’t it good enough for Harley?
The best way to defend a “Premium Product” is to make someone want it -
desire (aka demand) is king! If there is demonstrably weak demand, then
where’s the desire? Harley-Davidson is not Ferrari. At present many would say
it isn’t even Harley-Davidson, it isn’t sufficiently “in the game” to be spoken
of in the same breath as the determinedly creative sales drives of the past that
got it to its 115th anniversary.
For me, as I have said before, quite apart from apparent product design
uncertainty and engineering tardiness, it is marketing that is the big Black Hole
at the heart of their unive