The motorcycle market in the United States has been on the decline, but that doesn’t mean there aren’t some upside opportunities for investors. You just need to be careful. Before you invest, make sure that you understand some of the pros and cons of investing in this industry.
Pros and Cons of Investing in Motorcycle Manufacturers
First, there is the economy. An economic recession is most likely going to lead to depressed sales for motorcycle manufacturers because people as a whole will have less discretionary income.
Then, there are the tariffs. New tariffs on steel and aluminum from Europe implemented by the Trump administration are putting a “wrench” in the works.
The European Union responded to the new tariffs by making some of their own – and they are not messing around.
According to US News and World Report, “EU tariffs on imported motorcycles have jumped from 6 percent to 31 percent, or roughly $2,200 per motorcycle.” That was in June 2018.
There could be more changes coming, or not, but the impact of legislation on motorcycle manufacturers is clear.
Changing demand is also an issue. From 1992 to 2016, motorcycle sales steadily increased. They even boomed from 1999 to 2006 before falling off and returning to their historic sales volume. “Growing motorcycle sales is about two things—accessibility and desirability,” explains Ultimate Motorcycling. “Without those two needs being fulfilled, sales are going to plummet.”
In 2018, there is a wide variety of motorcycles on the market, many at a price tag that is readily accessible to the average consumer. The problem is that desire isn’t there.
Most young people are looking forward to electric cars and self-driving vehicles instead of hopping on a motorcycle and hitting the open road. Many would rather call an Uber than change their own oil.
Unless motorcycles become fashionable (hello, hipsters), the market may shrink or at least age. Point in fact, roughly half of all motorcycle riders are over 50 – in 2003, that figure stood at just 25%.
Motorcycle manufacturers need to create models and develop marketing that gets younger people excited about motorcycles. However not just any cool-looking bike will do. They also have to be simple enough to operate that they are appropriate for first-time riders and adding enough technology to keep modern users happy.
Is Harley Davidson Stock Worth Buying?
Harley Davidson (NYSE: HOG) was one of the early leaders in this new shift in focus. “Between 2006 and 2010, the number of big-engined Harleys registered in the U.S. plummeted by almost half,” writes Bloomberg. “The company has hosted riding academies for first-timers since 2000, but it quickly ordered its engineers to design a true starter bike.”
In 2013, Harley Davidson unveiled the Street 500. It has a smaller than 500 cc engine and a price tag of less than $7,000.
Originally, the company had operated under the premise that most of its customers start in another brand. With the Street 500, even new riders can get on a Harley.
Harley Davidson was also one of the companies hardest hit after the company announced that it would shift some of its operations overseas to avoid the new high tariffs. President Trump called the company out for the move and threatened to tax them “like never before.”
Some analysts also lowered their earnings estimates for the company.
The thing is that Harley Davidson could be risking bad PR by moving operations overseas, and analysts were not that bullish on the company to begin with.
Adam Jonas, an automotive analyst at Morgan Stanley is one of them. He isn’t convinced Harley would move operations because it would be too capital intensive. Jonas also said that the negative trend in demand is worrisome.
In late October 2018, Harley Davidson released its 3Q18 results. Revenue went up 15% year-over-year and the company’s earnings blew analyst estimates out of the water at 68 cents per share compared to consensus estimates of 53 cents and year-over-year results of 40 cents per share.
The method behind the melee?
International sales, which is part of the company’s strategy to mitigate the aging US market. Making bikes for India with an Asian manufacturing partner is one of the strategies Harley Davidson intends to use.
Should You Buy Polaris Stock (Indian Motorcycle)?
Indian Motorcycles are made by Polaris Industries (NYSE: PII). The latter bought Indian when the motorcycle maker filed for bankruptcy in 2011.
Since 2014, the newly acquired Indian has been producing bikes as well as increasing sales and stealing market share from Harley Davidson.
Indian’s parent company used to make Victory motorcycles, but it shuttered that brand imprint in 2017 to better focus on Indian.
However, Polaris does more than motorcycles. The company makes a variety of vehicles.
Snowmobiles and off-road vehicles (ORVs) are its largest segment. It also deals in aftermarket parts for both trucks and all-terrain vehicles (ATVs) after buying Transamerican Auto Parts in 2016 for $665 million. The very next year, that segment brought in a gross profit of $238 million and it has been growing since.
Things have not been all rosy for Polaris.
The company had a series of recalls in its snowmobile/ORV segment that hurt it.
Plus, while sales have improved, the growth is less than some analyst expectations. That said, it is still firmly in the single digits and getting close to double digits in some segments.
There are also other reasons to be encouraged, namely the company’s balance sheet. Polaris has been steadily, even aggressively, paying down its debts while growing its brands.
Indian Motorcycle Vs Harley Davidson Stock Summary
All told, Polaris is making some strong moves and they are paying off. The Indian Motorcycle maker has stumbled with its recalls, but it has a well-diversified business and a healthy balance sheet. Harley Davidson is enjoying some growth, but it will take some well-played efforts overseas and legislation that works in the company’s favor for it to continue growing those sales.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.