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Could Harley-Davidson’s Profit Margins Expand in 4Q17?

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Jan. 26 2018, Updated 7:33 a.m. ET

Harley-Davidson’s 4Q17 earnings

In the previous article, we looked at how analysts are expecting Harley-Davidson’s (HOG) fourth-quarter revenue to increase. Expectations of improvements in the company’s sales in North America during the holiday season could be the main reason for these high estimates.

Now, let’s explore analysts’ estimates for Harley-Davidson’s margins in 4Q17.

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Weak trend in profitability

In 3Q17, Harley-Davidson’s gross profits from its motorcycle and related products segment stood at $277 million, reflecting a massive fall of ~24.5% compared to its $367 million gross profit in 3Q16. With this, the company’s third-quarter gross margin from the segment was 28.8% in 3Q17, much lower compared to its 33.6% gross margin in 3Q16.

Weakening profit margins are one of the key concerns Harley is currently struggling with apart from its sales slowdown. Although the company has demonstrated an ability to improve its home market profit margins in the recent quarters, its margins from international markets continue to be dismal.

4Q17 profit margin estimates

Analysts expect Harley-Davidson’s consolidated gross profit margin to expand to 32.1% in 4Q17 compared to 30.7% in 4Q16. In contrast, analysts expect the company’s 2017 consolidated gross margin to contract to 33.9% compared to 35.1% in the previous year.

Harley-Davidson has increased its efforts to expand in international markets in the last few quarters due to ongoing challenges in the US market. With this, shipments of HOG’s low-priced motorcycle models have risen on high demand for such low-priced models outside the United States.

In the last few years, auto giants (VCR) such as General Motors (GM), Ford Motor Company (F), and Fiat Chrysler Automobiles (FCAU) have been trying to improve their manufacturing efficiencies to protect profitability. In 2016, Harley also decided to reduce its manufacturing-related costs by improving efficiencies, a move that should continue to act as a tailwind for its profitability in 2017.

Read on to the next article, where we’ll discuss what investors can look forward to from HOG’s 4Q17 earnings event.

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