What Harley's Tariff Plan Means for Investors
We're lowering our fair value estimate by a couple of dollars and expect shares to remain volatile short term.
In response to U.S. tariffs on imported steel and aluminum, the EU has placed tariffs on American-made goods, including
Shipments to Europe (16% of retail) could slow as 2018 progresses and contingency plans develop. Our 2018 forecast includes 227,000 shipments, below Harley’s guidance for 231,000-236,000 units. We have modestly lowered our 2019 shipments from 231,500 units (to 230,600), implying only 1.5% global growth as the company works through shifting its manufacturing. We expect the gross margin to deleverage materially in 2018 and 2019, pushing motorcycle operating margins down to about 11%, a level not seen since the recession. We expect margin expansion could resume in 2020, once overseas manufacturing changes are executed. In light of these updates, we plan to lower our $49 fair value estimate by about $2 and view shares as undervalued. We expect shares could be volatile until we hear a more thorough game plan alongside second-quarter results.
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