Harley Davidson Boosts Repurchase by an Additional 10 Million Shares – Buyback Wednesdays

Harley-Davidson (HOG) $33.48

Key Insights

• Harley-Davidson (HOG), which had for years experienced a decline in revenue started to see the top line rebound after the pandemic.
• Jochen Zeitz, the company’s new CEO was appointed right before the pandemic hit in February 2020 and has been turning the company around.
• During his 13 year tenure at Puma, the stock experienced a nearly 4,000% increase.
• At first glance it may appear that the company has a lot of debt but once you take a closer look at the balance sheet it becomes evident that the debt is related to the company’s finance division.
• Valuation looks attractive if consumer discretionary purchases are not impacted in the future.

Last summer during a trip to the Southern Indian town of Chennai, I happened to be waiting outside a restaurant with some friends when someone pulled up on a Harley-Davidson motorcycle. I almost missed this until a friend pointed it out to me. For a company that partnered with Porsche to create its beautifully designed V-Rod series of motorcycles, I was surprised to see such an unremarkable motorcycle that didn’t stand out in the crowd despite costing nearly ten times most other motorcycles that were parked around it.

Motorcycles in India are less of a luxury discretionary purchase and more of a common preferred mode of transportation. I was not surprised to see that the new CEO of Harley-Davidson decided to exit that highly competitive market, much like GM’s Mary Barra did in 2017.

Harley-Davidson (HOG) operates in two segments: Motorcycles and Financial Services. The company recently celebrated its 120th anniversary and has a market cap of $4.6 billion.

• The Motorcycles segment designs, manufactures, and sells Harley-Davidson motorcycles. It also offers a line of motorcycle parts, accessories, riding gear, and apparel.
• The Financial Services segment offers wholesale and retail financing services, including installment lending, motorcycle insurance, service contracts, and brand licensing for credit cards.

Source: gurufocus.com

In recent years the company expanded into the adventure touring market with its Pan America model and into electric vehicles with the LiveWire brand.

Harley-Davidson’s LiveWire (LVWR), released in 2019, was their first electric vehicle. The high-voltage battery provides a minimum city range of 98 miles. LiveWire targets a different type of customer than their classic V-twin powered motorcycles. It was initially launched as a dedicated electric vehicle (EV) division for Harley Davidson in July 2021. The company was spun off from its parent and went public on September 27, 2022, via a $1.8 billion SPAC merger with AEA-Bridges Impact Corp. It is the first publicly traded electric motorcycle company in the United States.

Harley-Davidson holds the majority ownership of LiveWire with a 74% stake. The independent company, however, is just a rounding error for Harley-Davidson with sales amounting to a mere $46.8 million for 2022, compared to Harley-Davidson’s revenue of $4.93 billion for the same year. LiveWire is unprofitable and sales growth has stalled.

In February 2020, Harley-Davidson appointed Jochen Zeitz as its new CEO. He had been on Harley-Davidson’s board of directors since 2007 before being appointed CEO. Mr. Zeitz had previously served as CEO at Puma for thirteen years. During his tenure Puma’s stock experienced a nearly 4,000% increase. Zeitz joined Harley-Davidson during the pandemic, at a time when the company was experiencing a big decline in sales. Given the various restrictions in place, individuals refrained from purchasing a high-end motorcycle. In the immediate year that followed after the pandemic, the company’s revenue started seeing a significant rebound and rose to as high as $4.54 billion from a decade-low of $3.26 billion. It is worth noting that revenue has been gradually increasing since then.

The company’s insiders have been buying shares at regular intervals. In August 2023, Director Masood Rafeh bought 1,302 shares, paying $49,997 at $38.4 per share. He had also purchased a similar amount of shares in the previous year around the same time. President and CEO Jochen Zeitz also picked up 25,750 shares last year, spending over $1 million.

Harley-Davidson recently introduced lifestyle apparel collections with superstars Post Malone and Jason Momoa. The company has partnered with Hollywood talent agency CAA to create entertainment opportunities in film, television, music, and podcasts.

In the last decade, Harley-Davidson’s performance has been dismal with a return of -34.39%. In contrast, the S&P 500 yielded a significantly higher return of 162.44% over the same time frame. So far this year, the company has experienced a return of -17.48%, which is well below the S&P 500’s return of 16.68%.

Dividends

Harley-Davidson has consistently paid dividends since 1993, with payments being made every quarter. It is important to mention that the company cut its dividend significantly during the pandemic. Dividends were reduced to as low as $0.02 from $0.38 for the last three quarters of 2020. Dividend payments rebounded since then with a current quarterly dividend of $0.17. This is still considerably less than the pre-pandemic quarterly dividend of $0.38. The company’s 12-month forward dividend yield is 1.97%. Analysts anticipate that by 2025, dividends will rise to $0.82 per share, representing a 20% increase from the current dividend.

Healthy Balance Sheet

Considering the company’s current ratio of 2.03, Harley has ample short-term assets to meet its immediate obligations. Moreover, the balance sheet appears strong with a net cash balance of $282 million. Given their substantial cash reserves, the company’s recent disclosure of a share buyback program appears well-timed and rational.

Profitability

Harley-Davidson’s gross margin of 32.57% as of June 2023, has been roughly the same for the past 5 years with minor fluctuations. The company’s net income margin, which decreased to low single digits during the pandemic, has since rebounded and is currently 13.03%, surpassing the sector median. While there have been concerns regarding the balance sheet, the company has shown a strong record of profitability, as seen in its impressive return on equity (ROE) figures. The current ROE is 26.12%, which is significantly higher than the sector median of 11.08%.

Source: InsideArbitrage.com

Share Repurchase

The company has been gradually buying back its own shares since June 2019, which has resulted in the retirement of approximately 9.63% of outstanding shares. The diluted weighted average shares outstanding have decreased from 147.4 million in Q2 2022 to 143.8 million in Q2 2023. The company has made discretionary repurchases of common stock, with $156.3 million or 4.1 million shares bought back in H1 2023.

Source: InsideArbitrage.com

In February 2020, the Board of Directors authorized the repurchase of up to 10 million shares with no dollar limit or expiration date, with 2.1 million shares already repurchased and 5.8 million remaining as of June 30, 2023. On September 6, 2023, the company announced an additional 10 million share repurchase program, which represents approximately 7% of its market capitalization at the time of the announcement.

Valuation

Harley-Davidson is currently trading at a valuation near its decade-low. Its current EV/EBITDA value of 9.45 is close to its lowest in the past 10 years. The company’s trailing twelve-month P/E ratio is also very low at 6.13, and could be another reason that prompted management to make a share repurchase announcement that could potentially trigger a response from investors.

Q2 2023 Results

The second quarter performance was less than impressive and did not meet the projected revenue and earnings expectations.

• Total consolidated revenue of $1.2 billion was down 2% compared to last year’s corresponding quarter.
• The revenue for Harley-Davidson’s Motor Cycle segment decreased by 4%. However, at Harley-Davidson Financial Services, revenue increased by 19% due to higher finance receivables, interest income, and investment income. On the other hand, LiveWire experienced a 44% decline in revenue because of lower unit sales for both electric motorcycles and electric balance bikes.
• Total consolidated operating income was $221 million, which was $56 million lower than the prior year.
• Earnings per share declined to $1.22 from Q2 2022’s $1.46, missing estimates by $0.07.
• Global retail sales of new motorcycles were up 3% versus the prior-year quarter. North America witnessed 1% growth in Q2 retail sales, mainly due to the high demand for Touring and Cruiser bikes, which saw a 7% increase. Asia-Pacific experienced significant growth of 24% in Q2 retail sales, attributed to strong demand in various markets.
• Total cash and cash equivalents ended at $1.05 billion, a decline of $540 million from Q2 2022.

Bottom Line

Going into this analysis of Harley-Davidson, I was not quite as excited by the company’s prospects but as I dug deeper, things got more interesting. I plan to do more work on the company in the coming days and it looks like a strong contender for coverage in our upcoming mid-month update and a potential addition to our model portfolio.

Welcome to edition 76 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

The pace of buyback announcement activity almost doubled with 14 companies announcing buybacks last week compared to 8in the prior week.

Top 5 Stock Buyback Announcements 

1. Imperial Petroleum Inc. (IMPP): $1.39

On September 7, 2023, the Board of Directors of this seaborne transportation services provider authorized a new $10 million share repurchase program, equal to around 29% of its market cap at announcement.

2. JE Cleantech Holdings Limited (JCSE): $0.5

On September 6, 2023, the Board of Directors of this cleaning systems manufacturer approved a new $1 million share repurchase program, equal to around 12.6% of its market cap at announcement.

3. The Beauty Health Company  (SKIN): $6.76

 On  September 12, 2023, the Board of Directors of this beauty products manufacturer authorized a new $100 million share repurchase program, equal to around 11.2% of its market cap at announcement.

4. Cohen & Steers Real Estate Opportunities & Income Fund (RLTY): $13.82

 On September 6, 2023, the Board of Directors of this open-end mutual fund authorized the repurchase of up to 10% of the Fund’s outstanding common shares during a calendar year.

5. Harley-Davidson, Inc. (HOG): $33.47

 On September 6, 2023, the Board of Directors of this motorcycle manufacturer authorized the Company to repurchase up to an additional 10.0 million shares., equal to around 7% of its market cap at announcement.

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