MORGAN STANLEY: It might be time for Harley Davidson to think 'more radically'

  • Harley Davidson has been struggling, in part because its core customer is getting older.
  • The company reported better-than-expected third quarter earnings.
  • But challenges remain, and the best path forward might be to consider “strategic options,” according to Morgan Stanley.

The best road ahead for Harley Davidson might be the one that says “sale.”

The US-based motorcycle company reported better-than-expected third-quarter earnings on Wednesday, but that may not be enough to pull the company out of rough territory, Adam Jonas, a Morgan Stanley analyst, said.

Jonas expressed concern over Harley’s forward guidance. The company hopes to see an improvement in profits thanks to higher pricing on some of its bikes, a favourable foreign exchange rate, and a richer product mix.

“Harley does not necessarily have the visibility or control of the variables for us to be convinced that the company is in a position to deliver on this, particularly given challenging industry dynamics,” Jonas wrote.

In a note titled “Messy Quarter: Too Soon to Consider Strategic Options?” Jonas suggested it might be time for the company to “think more radically.”

Morgan Stanley looked at a five-year leveraged buy-out scenario as a valuation tool:

“We execute a hypothetical buyout of the company’s equity funded 70% by new debt and 30% by new equity, normalizing HOG’s adjusted EBITDA margin to 22% (18% OP margin) by 2021 at which time we ‘exit’ the business at a 10x EV/EBITDA multiple from which we deduct remaining motorcycle net debt. The price we can pay for HOG while achieving a 25% IRR hurdle rate is $US54 per share.”

That’s 12.5% higher that Harley Davidson’s stock price late Wednesday, and in line with Morgan Stanley’s target price.

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