Yahoo Finance Polaris May Be Spared From Worst of Trump's Tariffs
Shares of Harley-Davidson (NYSE: HOG) have been hammered over the past two weeks as President Donald Trump's impending trade war has hit one of the most iconic manufacturers in the U.S. The European Union's decision to increase tariffs on motorcycles from 6% to 31% is the biggest hit, causing management to announce that it will move some manufacturing to Europe. Management is estimating that the impact of EU tariffs alone will be $90 million to $100 million annually.
Polaris' (NYSE: PII) stock has fallen along with Harley-Davidson, which, on the surface, seems logical because it sells into similar end markets. But the tariff pain may not hit Polaris nearly as hard, potentially creating a competitive advantage for the manufacturer.
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Harley-Davidson and Polaris don't see tariffs the same way
Harley-Davidson was so drastically affected by the announcement of the tariffs because Europe is one of its best markets. The region accounts for 16.4% of retail motorcycle sales, and those sales only declined 0.4% in 2017, compared to an 8.5% drop in U.S. sales and a 6.7% drop for the company overall.
The strong sales in Europe aren't all that surprising when you look at how popular motorcycles are there. According to Harley-Davidson's 2017 earnings filing, registrations for new motorcycles in Europe were 390,619 units compared to 288,802 in the U.S. Harley-Davidson would be crazy not to have a large business there, but the downside is that it's hampered by tariffs.
Polaris' sales are very different. It only generates 11% of sales from motorcycles, compared to 87% for Harley-Davidson, and only 13% of its total business is outside North America. With that said, an official told the Des Moines Register that motorcycle tariffs will add at least $15 million in costs in Europe, or about 3.6% of the company's operating income in the past year, with more potential impact to come. But Polaris' tariff costs pale in comparison to the as much as $100 million in expenses Harley-Davidson expects because of European tariffs, which could eat up 11.3% of operating income.
Polaris still faces tariff costs
As much as Polaris may have an advantage over Harley-Davidson with the tariffs the EU is putting on imports from the U.S., it faces challenges from tariffs of imports coming into the U.S.
Polaris will likely face higher costs in the U.S. as steel and aluminum tariffs hit the industry. Tariffs announced in late May will add 25% to the cost of imported steel, and 10% to aluminum coming from the EU, Canada, and Mexico. CEO Scott Wine said the tariffs could add $3 million in costs to production.
Harley-Davidson will avoid some of these steel and aluminum tariff costs by moving some manufacturing to Europe and Asia, and will avoid other tariffs as well by moving manufacturing to Europe. But the company can only avoid about half of the around $180 million European tariff impact (based on unit sales and average sale price in 2017). Polaris says it's considering making similar manufacturing moves to Europe, but no matter how you look at it, the tariff impact will be fairly small on the bottom line compared to Harley-Davidson's.
Trade wars are going to hurt motorsports stocks
I think Harley-Davidson will take the biggest hit from the recent round of tariff announcements with management's estimate of the impact at $90 million to $100 million annually, which could reduce operating income 11.3%. But both Harley-Davidson and Polaris are going to face higher costs in the second half of 2018 and into 2019, which either means they'll have to raise prices to maintain margins, or they'll have to accept lower margins due to the added cost. Harley's 15.5% operating margin leaves some leeway for the company to maintain profitability, but Polaris's 7.6% operating margin leaves a lot less flexibility if future tariffs are focused on its businesses.
Trade wars seem to be a new normal investors may have to get used to, but they won't impact all companies in the same way. For now, Harley-Davidson seems to be hit worse than Polaris.
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Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. The Motley Fool has a disclosure policy.
