Critics recently have said that rather than using the money Harley-Davidson (NYSE: HOG) saved from tax reform to save U.S. jobs, the motorcycle giant is using the benefit to export jobs to Thailand and lavish shareholders with dividend hikes and stock buybacks.
While the company did raise its dividend and says it will continue to repurchase shares, it has nothing to do with the new tax law and Harley says returning capital to shareholders only come after it invests in its business. Also, the expansion into Thailand is a business necessity with the decision made prior to any tax reform being announced.
Consolidating in a down market
Harley-Davidson is the victim of a slowing motorcycle market. First-quarter sales slid 12%, a much steeper decline than the 8.5% drop it suffered in 2017, and worse than the overall drop-off in the industry itself.
Baby boomers, who were the most consistent buyers of motorcycles for over a decade, were too hurt by the financial recession to return to their previous buying levels, and are now aging out of the market altogether.
Those who are buying — younger, more-urban riders, as well as women — aren’t attracted to the same kind of motorcycles. Although Harley and rival Polaris Industries (NYSE: PII), which owns the Indian Motorcycle brand, recognize this changing demographic, their designs haven’t adjusted enough to make a big enough impact.
It’s a steadily declining market with too much capacity, and Harley-Davidson is being prudent in consolidating its U.S. manufacturing facilities. While the closure of its Kansas City, Mo. factory means the loss of around 800 jobs there, some 400 new jobs will be created in the York, Pennsylvania, factory where the work is being transferred.
And though Harley-Davidson is opening a plant in Thailand, it’s not a result of exporting jobs overseas, but rather an attempt to meet the demands of the market, as well as to counteract protectionist trade policies.
Going where the sales are
The bike builder is looking to increase international sales to 50% of its total. Currently, the U.S. accounts for nearly two-thirds of the total, or 148,000 of the nearly 243,000 motorcycles it sold last year. International sales came in at just under 95,000 bikes.
Yet, as U.S. sales plunged in the first quarter, they increased incrementally overseas. Although sales in the Asia Pacific region fell nearly 8% in the first quarter and were down by a like amount in 2017, motorcycles made in the U.S. and exported to the region face substantial tariffs, making them uncompetitive with locally produced bikes.
For example, Thailand imposes 60% tariffs on motorcycle imports. If Harley assembled its bikes there, they would escape the duties, which is part of the reason for the new factory, expected to go live later this year. Once that happens, Harley will be able to ship more bikes to other Asian markets as well without facing similar tariffs because of trade agreements between the member countries of the Association of Southeast Asian Nations.
It also reduces the shipping distances to China, which is becoming a growing market for foreign-made motorcycles. Harley says it would reduced transport time from 45 to 60 days for bikes built in the U.S. to just five to seven days.
But U.S. jobs are not getting axed in the process, as Harley-Davidson will manufacture the parts for the bikes in the U.S., and ship them overseas for assembly, ust as it does with its facilities in Brazil and India. So no American jobs are being lost by the new plant.
The company certainly faces a tall order in increasing global sales to account for half its total. To bring them into parity with the U.S. would require Harley to significantly increase international sales. Harley-Davidson wants the total market to expand and wants to bring at least another 2 million riders to its brand over the next decade. Considering the decline in U.S. sales lately, that puts an even greater emphasis on the international market. Making its bikes competitive in price is an integral part of that, so getting around the tough tariffs is a smart move.
Spending money on itself
With that said, it is hard to justify Harley-Davidson’s stock buybacks other than as a means of propping up its per-share earnings. Its stock has lost 20% of its value over the past year, and is down by over 25% from its 52-week high. Yet last quarter, management spent $65 million repurchasing 1.4 million shares, which allowed it to post profits of $1.03 per share, just two cents below what it recorded a year ago. Had diluted shares outstanding remained constant from 2017, Harley would have reported earnings of $0.99 per share.
There are arguments to be made for buybacks, such as efficiently allocating capital, keeping the growth of shares from stock options in check, and if a company doesn’t have a better place to spend its money. But the latter reason certainly doesn’t apply with Harley.
It needs to build bikes consumers want to buy and ride if it wants to remain competitive, and it does say dividends and buybacks come after such reinvestment, but thus far has largely built bikes out of sync with the market.
We can quibble with whether Harley-Davidson should be building an electric motorcycle or just how many cruisers it needs to manufacture in a year versus smaller, lighter bikes. But it is wrong to suggest that it is pocketing money at the expense of its employees. Harley is taking necessary measures to make its U.S. business cost-efficient while ensuring its international business remains competitive.
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