Harley-Davidson, Inc.- Financial and Strategic Analysis Review

Transcription

1 Harley-Davidson, Inc. - Financial and Strategic Analysis Review Publication Date: Oct-2015 Company Snapshot Key Information Harley-Davidson, Inc., Key Information Web Address Financial year-end December Number of Employees 5,900 NYSE HOG Key Ratios Harley-Davidson, Inc., Key Ratios P/E EV/EBITDA Return on Equity (%) Company Overview Harley-Davidson, Inc. (Harley-Davidson) is a motorcycles manufacturing company. It designs, manufactures markets motorcycles and motorcycle parts and accessories, and general merchandise on wholesale basis. It also offers wholesale and retail financing, and insurance programs to its dealers and customers in the US, and Canada. Further, Harley-Davidson conducts e-commerce business through which it sells motorcycle parts, accessories, and related products and services. The company offers its products under six platforms: Touring, Dyna, Softail, Sportster, V-Rod, and Street. SWOT Analysis Harley-Davidson, Inc., SWOT Analysis Strengths Weaknesses Debt/Equity 1.89 Operating profit margin (%) Dividend Yield 0.02 Note: Above ratios are based on share price as of 14-Oct-2015 Share Data Harley-Davidson, Inc., Share Data Price (USD) as on 14-Oct EPS (USD) 3.88 Book value per share (USD) Shares Outstanding (in million) Operational Performance Business Performance: Motor Cycles segment Research and Development Opportunities Growth in Emerging Markets Strategic Initiatives New Product Development Increasing Debt Burden Declining Cash Reserves Threats Stringent Government Regulations Dependence on third party suppliers Stiff Competition Performance Chart Harley-Davidson, Inc., Performance Chart ( ) Financial Performance The company reported revenues of (US Dollars) US$6,228.5 million for the fiscal year ended December 2014 (FY2014), an increase of 5.6% over FY2013. In FY2014, the company s operating margin was 20.6%, compared to an operating margin of 19.6% in FY2013. In FY2014, the company recorded a net margin of 13.6%, compared to a net margin of 12.4% in FY2013. The company reported revenues of US$1,824.4 million for the second quarter ended June 2015, an increase of 9.1% over the previous quarter. Page 1

2 Key Information Harley-Davidson, Inc., Key Information Corporate Address 3700 West Juneau Avenue, Ticker Symbol, Stock HOG [New York Stock Exchange] Milwaukee, WI, , Exchange United States Telephone No. of Employees 5,900 Fax Fiscal Year End December URL Revenue (in USD Million) 6,228.5 Industry Locations Automotive, Consumer Products, Textiles Australia, Austria, Brazil, Canada, Czech Republic, France, Germany, Hong Kong, India, Italy, Mexico, Netherlands, Russia, South Africa, Spain, Switzerland, United Arab Emirates, United Kingdom, United States Company Overview Harley-Davidson, Inc. (Harley-Davidson) is a motorcycles manufacturing company. It designs, manufactures markets motorcycles and motorcycle parts and accessories, and general merchandise on wholesale basis. It also offers wholesale and retail financing, and insurance programs to its dealers and customers in the US, and Canada. Further, Harley-Davidson conducts e-commerce business through which it sells motorcycle parts, accessories, and related products and services. The company offers its products under six platforms: Touring, Dyna, Softail, Sportster, V-Rod, and Street. Harley-Davidson markets its products in North America, Europe, Middle East, Africa, Asia-Pacific and Latin America through a network of independent dealers. Harley-Davidson is headquartered in Milwaukee, the US. The company strives to design and manufacture unique vehicles to meet the evolving consumer preferences. To this end, Harley-Davidson launched two new models of its Street platform of motorcycles; Street 500, and Street 750. Page 2

3 Harley-Davidson, Inc. - SWOT Analysis SWOT Analysis - Overview Harley-Davidson, Inc. (Harley-Davidson) is a motorcycles manufacturing company. It designs, manufactures markets motorcycles and motorcycle parts and accessories, and general merchandise on wholesale basis. Its operational performance, business performance of motor cycles segment and research and development are its strengths, while increasing debt burden and declining cash reserves could be an area of concern. The company could benefit from growth in emerging markets, strategic initiatives and new product development. Nevertheless, its performance could be affected by stringent government regulations, stiff competition and its dependence on third party suppliers. Harley-Davidson, Inc. - Strengths Strength - Operational Performance Increasing profitability ratios indicate the company s sturdy performance and its ability to deliver the returns expected by its shareholders. The company s profitability increased considerably in FY2014. It recorded high operating income and margins. Its operating margin was 20.56% for FY2014, as against 19.5% for FY2013. The company reported operating income of US$ million for FY2014, indicating an increase of 11.03% over that for FY2013. Harley-Davidson reported a net income of US$ million for FY2014, indicating an increase of 15.07% over that for FY2013. The company also registered an increase in its profitability ratios. Its profitability ratios, such as return on equity, return on capital employed, return on assets, return on fixed assets and return on working capital employed increased from 24.38%, 16.73%, 7.8%, 21.3% and 77.99% in FY2013 to 29.03%, 17.94%, 8.86%, 22.95% and 82.17% respectively in FY2014. Strength - Business Performance: Motor Cycles segment The Motor Cycles segment continued to be a major strength of the company. The products that the segment offers include a range of accessories, motorcycle parts, general merchandise and related services. Through this segment the company manufactures custom and touring motorcycles under six major platforms, Touring, Dyna, Softail, Sportster, V-Rod and Street. For the fiscal year ended December 2014 (FY2014), the segment accounted for 89.4% of the company s total revenue. The segment revenue increased 5.88% from US$5, million in FY2013 to US$5, million in FY2014.The increase in segment sales was driven by the increase in sales of new motor cycle sales, which increased by 1.3% in the U.S and 5.4% in the international markets. The retail sales in Asia-Pacific region were driven by growth in emerging markets such as India and China. Strength - Research and Development Harley-Davidson has a strong research and development unit that facilitates innovation and attracts industry attention. Its Product Development Center (PDC) undertakes the development of new and better quality products. The company s research and development (R&D) activities focus on new product development to deliver products according to the customer requirements reducing the overall cost and time to market. In the FY2014, the company has spent US$138.3 million on its research and development activities. The company s strong focus on R&D helped the company to launch innovative products such as Harley-Davidson s continuous focus on R&D helped the company in launching innovative products such as Softail motorcycles with 1584 cc engine with new features such as new hand controls, a larger odometer, and an anti-lock braking system option. Continuous research and development activity enables the company to maintain a leading position in custom and touring motorcycle market and develop products for the performance segment. Focused R&D activities enable the company to offer innovative products and improve its operational performance. Harley-Davidson, Inc. - Weaknesses Weakness - Increasing Debt Burden Increasing debt could have a major impact on the operational performance of the company as a major portion of its earnings would be diverted to servicing of its debt obligations. This could be of concern to the investors as well, as it would be difficult for the company to raise funds on favorable terms from the market. Its total debt as of FY2014 was US$ million, which increased 4.67% over the previous year. As a result, the company s debt to equity ratio increased 1.89 times in FY2014 from 1.74 times in FY2013.If it fails to comply with any of the debt service requirements, the debt could become due and payable prior to its scheduled maturity. Such huge debt increases the debt servicing obligations of the company and impacts its cash flows adversely. It could limit Harley-Davidson s ability to raise debt in future and pursue other strategic opportunities. It would also increase the company s vulnerability to adverse economic and industry conditions. Weakness - Declining Cash Reserves Harley-Davidson reported a decrease in cash and cash equivalents for the past two fiscal years. The continuing decline in cash reserves is a cause for concern to the company. Harley-Davidson had US$ million in cash and cash equivalents as of December 2014, as compared to cash and cash equivalents of US$ million in FY2013, reflecting a decrease of 14.9%. The decrease in cash reserves could be due to the high current liabilities and negative cash flows from investing and financing activities. As a result, Harley-Davidson recorded net change in cash of (US$ million) in Page 3

4 FY2014, as against a net change in cash of (US$1.52 million) in FY2013. The decreasing cash reserves indicate the company s inability to obtain debt to finance acquisitions, capture business opportunities, and meet capital expenditure or other capital requirements in the future. Harley-Davidson, Inc. - Opportunities Opportunity - Growth in Emerging Markets The company's presence in emerging economies such as India could prove to be very beneficial to the company. The company has introduced Street motorcycles in India with low price range, aiming towards the young audience offering good city performance. Similarly, the company is considering an entry into the cc bike segment. According to analyst, the motorcycle demand is expected to reach more than 20 million in India by In India, only 6% of the total population has motorcycles. Similarly, market penetration in Indonesia, Brazil, Vietnam, Thailand and Taiwan are 20.8%, 7.6%, 29.6%, 25.4% and 62.4% respectively. Therefore, these markets offer huge potential for growth. Passenger vehicles accounted for 16% of the total number of vehicles sold in India. This was due to the easy availability of the loans to customers, and the growing number of people in the earning population segment in the country. With competition at its peak and markets getting saturated, the company can look out for new growth avenues in these regions. Opportunity - Strategic Initiatives The company has taken certain strategic initiatives that are aimed at enhancing its business operations and existing product line. In 2015, the company entered into agreement with its current exclusive distributor in Canada for distributing its products directly to dealers in Canada. In 2014, HDFS entered into agreements with local lenders, insurance companies and brokers to add 11 finance and insurance programs in Latin America, Asia-Pacific and EMEA. This could enable the HDFS to facilitate 82 finance and insurance programs in 32 countries. Opportunity - New Product Development The company s newly launched and pipeline products provide enough opportunities for it to improve its market share. In 2015, the company launched Street 750 and Street 500, motor cycles designed for urban riders. The company launched these two models in the US, Spain, Portugal, Italy and India. In 2014, the company has initiated Project LiveWire, an electric motorcycle model, which the company is offering demonstration rides in the U. S and plans to expand to Europe and Canada to understand the customer preferences and insights. Harley-Davidson, Inc. - Threats Threat - Stringent Government Regulations The company s domestic sales and operations are subjected to the US governmental agencies, including Environmental Protection Agency (EPA), SEC, National Highway Traffic Safety Administration, Department of Labor and Fedral Trade Commission. The company has to comply with various local, state, federal, foreign and transnational laws and regulations related to safety and emissions. The company s financial service has to comply with various foreign, federal and state laws. Compliance with the laws may be costly and could affect operating results and place limits on pricing. Failure to comply with these regulations, could affect HDFS earnings, limit it access to capital, limit the number of loans eligible for HDFS securitization programs and have a material adverse effect on HDFS business. Threat - Dependence on third party suppliers Harley-Davidson is dependent on a few suppliers for raw materials and components and in some cases it relies on single supplier to provide the entire requirement for specific parts. Such a situation makes the company s business dependent on the ability of the supplier to deliver the ordered raw materials in time. The rising input costs could also have a major impact on the operational costs of Harley-Davidson. Increasing pressure of the costs of commodities leads to capacity constraints, lower production and financial distress to raw material suppliers. In case of a delay in receiving the raw materials, product delivery to its customers could also get delayed, which impacts its business and customer relations. Threat - Stiff Competition The market for company s products, services and technologies is both competitive and price sensitive. The company s performance could be affected by the competitive environment in the medical devices and customer preferences in these markets. The demand for its products is impacted by competitive conditions, including the timely development and introduction of new competitive products and the response of Harley Davidson to downward pricing to sustain competition. Factors such as changing customer order patterns or competitors new products can impact the company s competitive positioning. The major competitors of the company include American Honda Motor Co., Inc., and Suzuki Motor Corporation and Yamaha Motor Co., Ltd. among others. Some of its competitors have higher financial, technical and other resources than what the company possesses. Page 4

5 Threat - Rapid Technological Changes The company products are subject to significant technological advances and product innovation and development. The company must continuously design new products, and update existing products and develop new technologies to meet its customers demands. The launch of new products and technologies involves a significant commitment to research and development. Upon investing in these new technologies, the company s profits may suffer if they are not accepted in the marketplace as anticipated. Additionally, its competitors may develop innovative technologies and products, which could render its technology and products under development obsolete or uncompetitive. NOTE: The above strategic analysis is based on in-house research and reflects the publishers opinion only Page 5