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HARLEY-DAVIDSON, INC.

2018
It was the afternoon of July 30, 2018 and Aditi Basu just disconnected from Harley-Davidson’s sell-side
analyst webcast, where the company’s new “accelerated” strategy was discussed. Basu worked as an
analyst at Dimensional Fund Advisors (DFA), which has held a position in Harley-Davidson beginning in
2004 (See Exhibit 1 for a description of DFA). DFA’s position has been increasing in size over time and
now exceeds 1.4 million shares (see Exhibit 2 for details on DFA’s holdings over time). Initially the
stock performed remarkably well for DFA, particularly since 2010, increasing almost 30% per year
through late 2013. At its peak in April 2014, the stock traded slightly above $66 per share. Since then,
however, the stock has mostly declined (see Exhibit 3 for Harley-Davidson’s stock chart). The closing
price for Harley-Davidson stock on July 27, 2018 was $44.48.

The last few months had been incredibly tumultuous for Harley-Davidson. In late June, responding to
new European Union tariffs on motorcycles, the company announced it would be shifting manufacturing
to Europe of motorcycles sold there. This announcement in turn lead to a series of critical tweets by
President Trump. Most recently, the company released its second quarter results and announced it would
be rolling out a new corporate strategy. While her initial reaction to the strategy rollout webcast was
positive, Basu wondered if parts of the plan were bold or simply desperate. Were the best days for the
company, whose motto is to “bring more freedom to the world”, coming or in the past?

HARLEY-DAVIDSON BACKGROUND & RECENT EVENTS

Harley-Davidson, Inc. is the parent company of Harley-Davidson Motor Company and Harley-Davidson
Financial Services. The company was founded in 1903 and is headquartered in Milwaukee, Wisconsin
(see Exhibit 4 for more complete description of Harley-Davidson’s businesses). The company’s stock
trades on the New York Stock Exchange under the ticker symbol HOG.

In recent years, Harley-Davidson has faced two significant challenges. First, the rate of growth of
Harley-Davidson motorcycle ownership has dampened since the credit crisis in the U.S. and ownership
for major competitors has actually declined as has overall ownership (see Exhibit 5). As a result, Harley-
Davidson and competitors have had to look to new markets for growth. Second, starting in 2017, trade
issues have complicated Harley’s global aspirations. First in early 2017 the U.S. pulled out of the Trans
Pacific Partnership (TPP) which would have reduced tariffs on US motorcycles from approximately 70%
to 0%. Harley-Davidson responded by announcing plans to begin manufacturing motorcycles in Thailand
to serve Asian markets and avoid the 70% tariff. Then in March 2018 President Trump announced plans
to impose a 25% tariff on steel and aluminum imports from Europe, key inputs to motorcycle production,
as recommended by the US Commerce Department. In response to these new tariffs the European Union
(EU) announced in May it would impose reciprocal tariffs of 31% on certain items imported from the US,
including motorcycles (up from 6%).

On June 25, 2018 Harley-Davidson announced in a regulatory filing (see Exhibit 6) that in response to
the new EU tariffs it would not increase prices (cutting significantly into margins) and would gradually
move production to Europe of motorcycles sold there. Europe had become a significant market for
Harley-Davidson, accounting for approximately 16% of its sales. That market also has experienced more
growth than the US (retail growth in the first quarter of 2018 was 8% in Europe compared to -12% in the
US; see Exhibit 7 for Harley-Davidson annual revenues by geographic region). The June 25
announcement angered the US administration, with President Trump posting several negative tweets (see
Exhibit 8). The presidential backlash is potentially serious given the significant overlap between US
Harley-Davidson owners and President Trump supporters.
To see the impact of recent challenges for Harley-Davidson, Basu gathered recent financial statements for
the company (see Exhibit 9) along with key financial rations (see Exhibit 10).

SECOND QUARTER RESULTS AND STRATEGY ANNOUNCEMENT

Harley-Davidson released its 2018 second quarter results on July 24, 2018. At that time, the company
announced it would share plans to accelerate its strategy to build the next generation of riders globally on
July 30. When it became available, Aditi Basu downloaded the accelerated strategy presentation and
listened to the sell-side analyst Q&A webcast.1 Harley-Davidson had previously articulated objectives it
hoped to achieve by 2027 including the following:
 Attract 2 million new Harley-Davidson riders in the US
 Grow international business to 50% of annual volume
 Launch 100 new high impact Harley-Davidson motorcycles

The new accelerated strategy identified some short-term plans to help the company more quickly achieve
the 2027 objectives and set some new targets to achieve by 2022 (e.g. increase motorcycle revenues 1 to
1.5 billion; improve operating margin by 0.75 to 1.25%). The company announced some specific new
product initiatives including smaller engine motorcycles, more popular overseas, as well as electric
motorcycles. The company also announced changes to its distribution strategy (new retail formats and
greater online presence).

There were elements of the new accelerated strategy that appealed to Basu. She liked the detail and
specificity of the plan and she thought the company was responding to important consumer trends. There
were also parts of the plan that concerned her. Would the focus on overseas consumers and
smaller/electric motorcycles offend the traditional US Harley-Davidson owner? Would that focus lead to
further criticism from the US government?

VALUING HARLEY-DAVIDSON

In trying to decide whether to recommend if DFA should increase, decrease or leave its position in
Harley-Davidson stock unchanged, Aditi Basu wanted to determine whether the company’s shares were
fairly priced. She decided to use the dividend discount model to determine what she thought would be an
appropriate valuation for Harley-Davidson. As one key input to this model, Basu estimated that the
required return for Harley-Davidson stock going forward should be approximately 8%.

Harley-Davidson has paid increasing dividends in every year since 1994, except 2009 when dividends
were cut by 70% in the wake of the global financial crisis (see Exhibits 11 and Exhibit 12 for selected
earnings and dividend information). Over the last 12 months (LTM) up to July 30, 2018, Harley-
Davidson paid $1.47 per share in dividends. The LTM earnings per share (EPS) was $2.92.

Looking forward, Basu obtained information on sell-side analyst earnings and dividend forecasts for
Harley-Davidson. The consensus forecast EPS for the twelve months ending July 2019, July 2020, July
2021, July 2022, and July 2023 is $3.18, $3.56, $4.06, $4.34, and $4.65 respectively. This reflects the
confidence analysts have in Harley-Davidson’s new plan to reverse a recent earnings decline. At some
point, analysts expected growth in earnings to decline to a more modest rate of 3-5% per year for the long
run.

The consensus analyst forecast for dividends per share for the twelve months ending July 2019, July
2020, July 2021, July 2022, and July 2023 is $1.50, $1.56, $1.80, $1.95, and $2.10 respectively (see

1
She also watched a new promotional video (https://www.youtube.com/watch?v=j2XglhtZTbA&feature=youtu.be)
Exhibit 13). The dividend payout ratio for the twelve months ending July 2023 is, therefore, expected to
be 45.2%. While dividend forecasts beyond July 2023 are not broadly available, Basu expected Harley-
Davidson to set a payout rate around 45%, the maximum payout ratio typically targeted by mature
companies.

With all this information in hand, Aditi Basu began mulling over the investment case for Harley-
Davidson. Would the new strategy turn the company around or expose it to risk of backlash from
consumers? Did the current share price of $44.48 represent a good buying opportunity or was it time to
sell?

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