In this segment of the Market Foolery podcast, Chris Hill and Seth Jayson from Motley Fool Hidden Gems try to map out where heavy-bike maker Harley-Davidson (NYSE:HOG) is going next, in a period where demand for its signature products is declining.
The company asserts that it can create new markets for its motorcycles, and it’s building new models to appeal to different audiences. But will that be enough, even for a company with such a devoutly loyal following? and how does the price of gas factor in to Harley’s stock thesis?
A full transcript follows the video.
This video was recorded on Oct. 17, 2017.
Chris Hill: Harley-Davidson. Their third-quarter profits and revenue came in lower than a year ago. And in terms of the stock, this is the mirror opposite of Netflix. As Netflix opened this morning at a brand-new all time high and then dropped back down a little bit, Harley-Davidson opened this morning at a 52-week low and then has gone back up to the point where it’s up about 3%-4%.
Seth Jayson: Yeah.
Hill: I’m not trying to hate on Harley-Davidson, but what has happened in the last two hours to make people think, oh, no, it’s actually much better than we thought?
Jayson: I don’t know. Harley has a problem, which is, the folks who want to get on a big, huge motorcycle, that’s a dwindling supply. And they acknowledge this in their call, talking about how they need to get new riders, and they have a lot of plans and programs to painstakingly create new riders. They’ve tried to reach out to younger generations with motorcycles that are less expensive, and the margins aren’t as great. I think motorcycle sales were down 14%.
When a company like Harley is talking about inventory management, and they’re talking about social-media hits and signups in Europe, you know things aren’t going so well. They’re trying to find new ways to market, and they’re having trouble with their core consumer.
And I’m one of those people. I always wondered why everybody was excited about Harleys for 10 or 15 years, because before that, it was kind of a niche thing. My uncle Charlie was always a Harley type dude — a big, hairy dude who rode Harleys. And then, all of a sudden, every middle-aged yuppie dude was growing a beard and buying one of those helmets and riding a Harley. And now that’s fading. Some of them are just getting too old to hold those giant motorcycles up anymore.
Hill: A year or two ago on this podcast, I think it was because we were talking about Harley, I think it was Bill Barker who made the point, in talking about the brand appeal, he made the point, what other brand out there is so beloved that people are literally tattooing the brand on their bodies?
Hill: [laughs] Well, we were trying to stick to publicly traded companies, but yeah, if you want to go Justin Bieber, you can do that. I think one of the things with Harley Davidson — and this is the opposite of something we’ve talked about most recently with airlines — if part of the bull case right now for airline stocks is the price of fuel is not as expensive as it used to be, for a pretty decent amount of time, part of, not the main, but part of the bull case for motorcycles in general and Harley-Davidson in particular was the price of gas going up. And it’s one less compelling argument to buy a motorcycle, if all of a sudden gas is under $3 a gallon in perpetuity.
Jayson: Yeah. I’m not sure. Maybe there are coincidences that prove otherwise, or people might say they do. I’m not sure the price of gas matters all that much for some of these leisure vehicles. I have watched the RV industry pretty closely, expect high gas prices to put a major crimp on RV sales. And they don’t generally do that, and even the folks inside the RV industry said it’s not so much high prices, it’s volatility that spooks people. But right now, RV shipments are near all-time highs, and motorcycles aren’t. So that tells you people are spending their leisure vehicle money in a different place right now.
Hill: I would be far more interested in a motorcycle if I lived somewhere outside of the city. I think if I lived somewhere in the country, I would be more likely to.
Jayson: I got over them a long time ago. I used to ride every day. It was my commuting vehicle.
Jayson: After nearly being killed enough times, I said, no more of this.
Hill: Wait a minute. Was this when you were in Minnesota?
Jayson: Yeah, between college and grad school.
Hill: Even in the winter?
Jayson: No. In the winter I did not commute on the motorcycle. Little bit tough.
Hill: [laughs] OK, probably just as well.