Shares of Harley-Davidson Inc. (HOG - Free Report) fell 5.5% by Monday afternoon with news that the firm will be moving a portion of its European consumer production out of the United States to its international facilities. This news comes after the European Union imposed $3.2 billion in tariffs on the US on Friday, on goods including motorcycles, denim, and cigarettes, amongst others.
The Big Picture
As our team highlighted, HOG foresees costs from these tariffs amounting to $100 million annually, and between $30 to $45 million for the rest of this year. The EU raised its 6% motorcycle tariff to 31%, which according to the firm makes each bike $2,200 more expensive to export.
The firm also announced that it will not raise prices to cover costs, instead making this production shift to help soften the burden. HOG expects the increase in production in international plants to require incremental investment and to take between 9 to 18 months to be fully complete.
More details about the financial implications of this move, as well as plans to mitigate the effects of the tariff, will be released during the firm’s Q2 earnings conference call in late July.
Europe is a key segment for HOG, representing the second largest portion of the firm’s total revenue, second only to the US. This news is the latest in a string of bad news for HOG. In its Q1 earnings report, HOG announced a 7.2% decrease in worldwide retail sales of motorcycles, guided primarily by weakening demand in the US. The firm believes the trend will continue, expecting to ship between 231,000-236,000 units of motorcycles in fiscal 2018, down from the 241,498 units in the previous year.
These trends are reflected in the stock’s performance, which has seen a 16% loss in value over the last six months compared to the industry average of a 3% loss. Furthermore, the firm has seen a consistent downward trend in gross margin in recent quarters, falling 2.6% to 38.7% since Q4 2015, a reflection of rising costs and industry pains.
Although recent news has been less than stellar, not all is bleak for the firm. The firm is making long-term investments to expand its product portfolio, aiming to launch 100 new motorcycles by 2027. The firm also plans to release electric motorcycles by as soon as 2019.
Furthermore, HOG is increasing its international exposure, expecting an increase of 50% of yearly volume by 2027 and adding 150-200 new dealerships internationally by 2020. These initiatives will help reduce the effect of consumer trends in the US.
HOG currently sits at a Zacks Rank #3 (Hold) and holds an “A” grade for Value in our Style Scores system. While the firm is projected to see a 2.6% decrease in EPS this fiscal year to $3.38, it is also projected to see a 17.1% increase next fiscal year to $3.96 based on recent earnings estimate revisions. Overall, the stock is one that investors should remain vigilant in monitoring moving forward.
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