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What to Expect from Harley-Davidson’s Q3 2018 Profit Margins

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Harley-Davidson’s Q3 2018 earnings

In the previous part of this series, we saw that analysts are expecting Harley-Davidson’s (HOG) third-quarter revenue to improve year-over-year. Despite weak US sales, expectations of improvement in international sales could be the main reasons for the positive estimates.

Now let’s explore analysts’ estimates for Harley-Davidson’s profit margins for the third quarter.

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Trend in profit margins

In the second quarter, Harley-Davidson’s gross profits from its motorcycle and related products segment were $532 million. That’s a minor decline of ~7.6% from $576 million in the second quarter of 2017. With that, its gross margin from the segment was 34.9% in the third quarter of 2018, which was lower than 36.3% in the second quarter of 2017.

Along with a sales slowdown, HOG is also struggling with weakening profit margins. Although the company has demonstrated an ability to improve its US market profit margins in recent quarters, its margins from international markets remain weak.

Estimates for Q3 profit margins

Analysts are expecting Harley-Davidson’s consolidated gross profit margin to expand marginally to 29.1% in the third quarter, from 28.8% in the third quarter of 2017. However, analysts estimate its 2018 adjusted gross margin to shrink to 32.4% compared to 33.6% in 2017.

Harley-Davidson has increased its efforts to expand its presence in international markets in the last few quarters due to ongoing challenges in its home market. With that, shipments of HOG’s low-priced motorcycle models have increased since the demand for them is high outside North America.

In the last couple of years, auto giants (IYK) General Motors (GM), Ford (F), and Fiat Chrysler (FCAU) have been trying to improve their manufacturing efficiencies to protect profitability. In 2018, Harley has continued to drive its manufacturing optimization efforts, which are acting as a tailwind for its profitability. Costs related to manufacturing optimization took ~$0.07 per share from HOG’s second-quarter earnings in 2018.

In the next part, we’ll take a look at Harley-Davidson’s current valuation multiples before its third-quarter earnings event.

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