Morningstar has reaffirmed a HOLD rating on Harley-Davidson Inc. (NYSE: HOG) with a fair value estimate of $33.50, noting the stock’s current price of $34.13. Despite some progress in cost management and profitability initiatives, Harley-Davidson faces significant headwinds, including declining shipments and weaker consumer demand. The recent reduction in Morningstar’s economic moat rating from “wide” to “narrow” reflects challenges in retaining market share and profitability, especially in the face of changing consumer preferences and increased competitive pressures. The report advises investors to maintain a cautious stance, with limited upside anticipated in the near term.

Financial Performance and Valuation

Fair Value Estimate: Harley-Davidson’s current trading price is slightly above Morningstar’s fair value estimate of $33.50. This fair value reflects the expectation that shipment volumes and profitability may stabilize but will face prolonged challenges.

Q3 Financials and Profit Margins: In Q3 2024, Harley-Davidson experienced a substantial 39% decline in shipments, much higher than the previously anticipated 22% drop, significantly impacting operating margins. The motorcycle segment’s operating margin dropped by 720 basis points YoY to 6.3%, reflecting poor cost absorption due to volume declines.

Segment Outlook and Key Drivers

Motorcycle Segment: Harley’s core segment is seeing reduced demand, driven by higher financing costs and cautious consumer spending, particularly in the heavyweight bike category. Morningstar expects Q4 shipments to decrease by 40%, leading to a full-year decline in operating margins from 13.6% in 2023 to around 10.5-11% in 2024.

Electric Vehicles (EV) Growth Prospects: Harley’s LiveWire brand, dedicated to EVs, is expected to grow modestly, though its target of over 1,000 units in 2024 falls short of initial projections. Electric motorcycles currently offer lower profitability, which may weigh on overall margins as this segment expands.

Long-Term Strategic Considerations

Shift in Market Share and Economic Moat: Morningstar’s decision to narrow Harley-Davidson’s economic moat rating reflects its declining brand power and market share. Harley’s hold on the heavyweight motorcycle market in the U.S. fell from above 50% pre-pandemic to approximately 38% in 2023, impacted by shifts in consumer demand towards lighter and electric models.

Capital Allocation and “The Hardwire” Strategy: CEO Jochen Zeitz’s “The Hardwire” strategy aims to improve Harley’s brand and profitability through a focus on high-margin segments, selective expansion, and streamlining of operations. This strategy is expected to enhance the brand’s positioning but faces challenges in addressing structural demand declines.

Future Growth and Revenue Drivers

Revenue Projections and Segment Potential: Morningstar projects average revenue growth for Harley’s parts, accessories, and financial services divisions at around 2% over the next decade, with modest pricing power in motorcycles. Heavyweight bikes will continue to dominate revenue but face pricing pressures.

Electric Segment Outlook: LiveWire’s growth remains limited, with unit forecasts reduced substantially from the initial 15,000 annual units to 1,000 in 2024. Morningstar forecasts a slower adoption curve for Harley’s EV offerings, which could benefit profit margins by reducing the volume of lower-margin EV sales.