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Harley-Davidson: These Hogs Remain Attractive As Sales Rebound

 December 05, 2012 03:10 PM

(By Mani) Dealer feedback and recent sales and registration data indicate that Harley-Davidson Inc. (NYSE: HOG) motorcycle sales have rebounded nicely from a late summer slowdown.

Consumers and dealers seem especially pleased with new motorcycle models, including 110th Anniversary editions, the new CVO Breakout, the redesigned Street Bob, additions to the HD1 program, and hard candy paint jobs.

It appears that both Harley-Davidson and the US motorcycle industry are seeing renewed growth in sales after a summertime lull. Latest data from the Motorcycle Industry Council (MIC) shows that September US motorcycle retail sales grew 5.4 percent after an 8.5 percent decline in August and a 7.4 percent drop in July. According to MIC, Harley's US sales grew 8.9 percent in September.

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"We believe that growth has accelerated into 4Q, with retail sales running up close to 15% in October and up low double digits in November. Our estimate for total 4Q US retail sales growth is 10%," BMO Capital Markets analyst Gerrick Johnson wrote in a note to clients.

The company is growing sales through innovation and quality products and has been successful in attracting new riders and broadening its customer base. Benefits from restructuring and operating expense savings should allow these top-line gains to fall to the bottom line at a faster rate.

"We believe consumer response to the new 2013 models has been very favorable. We think there may have been some investor concern about the 2013 lineup, which included only one all-new model. However, for the Harley consumer, there is actually plenty of newness to choose from," Johnson said.

[Related -Harley-Davidson, Inc. (HOG): Replacement Cycle, Strong Demand Bodes Well For Topline]

The all-new CVO Breakout sells through even before hitting dealers' lots. Dealers have been receiving this one in limited supply, and wishing they could get more quickly.

The response to the 110th anniversary bikes has also been very positive. The motor company is getting good reviews from dealers and consumers on the execution of the program. The bikes look good, with a stylized winged anniversary badge and two-tone vintage bronze/anniversary black paint scheme that, all together, makes a very sharp looking motorcycle.

"We believe the introduction of "hard candy" paint as a standard color 1 has also generated excitement and sales. This paint is particularly attractive to the core customer who remembers the paint being popular in the 1970s," the analyst noted.

Meanwhile, the redesigned Dyna Street Bob is getting very good reviews and generating a lot of consumer interest. The Street Bob is now also now part of the HD1 customization program, along with the 1200 Custom, giving it more appeal.

Channel inventories seem to be in good shape as dealers benefited from an extra month of opportunity for sell-through, with new models now released in late August rather than in late July.

"Our online inventory checks indicate that November inventory in the channel is up about 8% on a year-over-year basis and 11% on a month-to-month basis. This growth is likely below what we think is a low-double-digit retail sales growth rate in the month," Johnson wrote.

It appears the company is doing a much better job of having what consumers want available at retail. This should improve as the company implements flexible production at its York plant in 2013. The mix of inventory in the channel looks very positive, with prior-year model inventory down 31 percent while current model year inventory is up 32 percent. Pre-owned inventory is up 6 percent.

On the valuation perspective, shares of Harley-Davidson trades at 13.5 times 2013 consensus earnings of $3.41, which represents good value and an attractive entry point. This valuation is a discount to the company's historical average of about 15 times and analyst Johnson's expectation of about 20 percent EPS growth over the next two years.



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