Inflation and Supply Chain Costs Take a Bite Out of Harley’s Profits; Shares Undervalued

We plan to raise our $42 fair value estimate for wide-moat Harley-Davidson by a mid-single-digit rate after digesting first-quarter results, with shares looking attractive at more than a 15% discount. Like other OEMs, Harley continues to face significant supply chain limitations, constricting the firm’s ability to achieve optimal throughput. As such, Harley was only able to ship around 55,000 units in the period, flat relative to last year and below our high-single-digit rate forecast. The company’s operating expense ratio was well contained (flat at 15.7%) but cost inflation ate into gross margin, which contracted by 280 basis points, a metric we see as fairly decent given recent rhetoric offered by other companies in the current earnings period. This was the main factor driving the motorcycle operating margin to 15.6%, down 290 basis points (which was still above our 14% projection).