Last October, the new CEO at Harley Davidson (HOG) — Mr. Jochem Zeitz (who took office last February, 2020) — disclosed the firm's strategic plan to exit from unprofitable markets between 2021 and 2025; the stock rallied 22% that day, notes Jim Osman, founder of The Edge Consulting Group and editor of Special Situations Lite.
Harley Davidson is poised for a successful turnaround; it has already exited from 39 low volume and low profitability markets — while focusing on the remaining 36 high potential markets.
The firm is targeting sustained profitability. That means improved pricing (eliminate discounting) of the HOG motorcycles, a sharpening focus on the most profitable Stock Keeping units (SKU’s) and reducing inventory levels.
We believe this re-positioning (named The Rewire and The Hardwire) has potential to generate around $800 million to $1 billion of free cash flow (FCF) yearly starting from FY21E.
This cash flow will help reduce HOG’s high net debt load of $6.0 billion (at 7x at FY21E EBITDA) towards comfortable levels of $ 3billion to $4 billion in next 2 to 3 years.
In addition, the management is exploring a partial sale or spinoff opportunity for its eBicycles business while entirely focusing on Motorcycles business. We see this as a positive move which has the potential to raise capital for HOG for its debt repayment.
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Potential Upside: The Edge view is that HOG’s brand heritage and quality will play an important role in this transformation. Having said this, we remain positive on HOG’s transformation efforts and suggest investors to get involved as we have a bull case with potential upside of 32.5% from current levels.
Medium-Term View (2 to 3 years): We believe HOG can revisit $60 levels as seen in 2017. For that, HOG needs to considerably reduce its net leverage below 3.0x (below net debt of $3 billion) from current 7.0x (at a net debt of $6 billion).
The internal cash flow accretion ($800 million to $1 billion FCF from FY21E) as well as potential sell or spinoff of its eBicycles business will help HOG stock price to regain its past glory.
