Cost Absorption and Pricing Lift Harley’s Profits, While Hardwire Stage 2 Initiative Advances

Wide-moat Harley-Davidson delivered impressive third-quarter sales and profits, as unit throughput accelerated following the firm’s second-quarter production suspension. Motorcycle sales rose 28% to $1.1 billion, driven by 19% unit and 7.5% price growth. This led to massive expense leverage, with cost of goods sold contracting 740 basis points (to 66%) and selling, general, and administrative costs down 210 basis points (to 16%). In turn, Harley was able to post a nearly 18% motorcycle operating margin, a third-quarter mark unseen since 2007. With the company’s full-year outlook for motorcycle company sales rising 5%-10% and operating margin of 11%-12% unchanged, the fourth quarter is likely to see motorcycle revenue grow at a low-double-digit pace with mid-single-digit negative operating margin (which would be a marked improvement from a 12.3% operating loss in the fourth quarter of 2021), by our calculations. We expect to increase our $43 fair value estimate for Harley by a high-single-digit rate to account for third-quarter outperformance and view shares as modestly undervalued, even after a double-digit post-print pop.