Is This How Harley-Davidson Beats the Motorcycle Competition?

By Markets Fool.com

Harley-Davidson (NYSE: HOG) is having a horrible time selling motorcycles. The iconic manufacturer of American-made iron horses has suffered through eight consecutive quarters of lower year-over-year sales, as the ubiquity of its bikes and a weakened industry caused demand to fade. But the Milwaukee-based motorcycle maker may have finally found a way to lure them back: a big, new, throaty Milwaukee-Eight engine that replaces its 15-year old Twin Cam.

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Harley-Davidson has had a hard time getting its touring bikes to head out on the highway. Image source: Harley-Davidson.

A bad case of road rash

The prolonged slide in sales has hit Harley-Davidson's touring bikes especially hard, a worrisome trend because they're its biggest sellers, accounting for 40% of total bike sales. Over the past two years, the touring segment saw sales tumble 11% to almost 89,500 bikes. In comparison, over that same time frame, cruisers rose 3%, and the Sportster and Street models were up 9%.

Data source: Harley-Davidson quarterly SEC filings. Chart by author.

As a result, nine-month motorcycle revenue has fallen as well, down 4.6% to $3.4 billion. Where those sales have gone is to the competition, namely steel-cage-deathmatch rival Indian Motorcycles from Polaris Industries (NYSE: PII).

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On the warpath

While Harley has seen its bike sales slide, Polaris has enjoyed double- and triple-digit growth for the Indian nameplate. While admittedly starting from a much smaller base -- Polaris bought the Indian brand out of bankruptcy in 2011 -- it has continued to post strong gains even as industry fundamentals have weakened considerably.

For the first three quarters of 2016, Polaris recorded 13% growth in motorcycle sales even as overall motorcycle-industry retail sales for bikes 900 cubic centimeters and above were down by high-single-digit percentage rates in the third quarter. Although Polaris did generate strong sales following the introduction of its three-wheeled Slingshot motorcycle and more recently the turnaround with its Victory brand, the vast bulk of its sales growth has been the remarkable rise in Indian sales.

Image source: Harley-Davidson.

A new engine of growth?

That's why Harley-Davidson's new engine design is an exciting development for the company. It promises to attract riders again who are looking for the familiar sound, feel, and power of a Harley motorcycle while meeting the challenges of new EPA emissions and fuel economy standards.

In its just-released third-quarter earnings, Harley said that although motorcycle sales disappointingly fell once again, this time dropping over 7% in the U.S., after introducing the new Milwaukee-Eight engine in August on its new 2017 model touring bikes, segment sales climbed higher in September.

It's about time

The touring bikes are getting this big block first. The Milwaukee-Eight -- which references the fact that the engine will have four valves per head, giving you 50% more flow -- comes in two flavors: a 107-cubic-inch (1,750 cc) model, that will be featured on the Road King, Street Glide, Road Glide, Electra Glide, and Ultra Limited models; and a 114-cubic-inch (1,850 cc) version that will be on its CVO Limited and CVO Street Glide models. Make no mistake, though: This will be the engine that powers all of Harley's motorcycles in the future.

This is the ninth Big Twin engine in Harley-Davidson's history, and the first new one in 15 years. The motorcycle manufacturer says it "offers quicker throttle response, more passing power, purer sound, a smoother ride, and more of the feeling" riders have been looking for. If September sales are any indication, they've found it, and that could lead more riders back to the biggest bike maker in the country.

3 big risks remain

Investors, however, should remain leery. There's a good chance the bounce Harley saw in sales following the Milwaukee-Eight's introduction is not sustainable, but rather was the result of the excitement surrounding the new engine.

Will Harley-Davidson have any better results with the Milwaukee-Eight as it did after reintroducing the Road Glide? Sales of touring bikes have fallen following a brief bounce they got when the big bike was brought back to market. Image source: Harley-Davidson.

For example, when the motorcycle maker reintroduced the Road Glide two years after dropping it from its lineup the year before, sales were brisk afterwards and represented 14% of total quarterly sales immediately afterwards. But as noted above, Harley's touring bikes generally have fallen out of favor with buyers since then.

And while the new engine should also help Harley retain its premium price positioning, that hasn't necessarily worked in the bike maker's favor. It may have retained its margins, but it's been losing customers and market share too.

Last, the fourth quarter is typically Harley's weakest, and even though it has maintained its shipment guidance for the year, expecting to ship between 264,000 and 269,000bikes to dealers in 2016, industry trends suggest it may miss that goal. Harley-Davidson has used some seemingly questionable tactics to make its numbers over the past two years and may do so again just to clear the lower end of its threshold.

Investors could experience significant disappointment again, and the rally Harley-Davidson stock has been enjoying may just cause it to go into an uncontrolled skid.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.