Harley Davidson Shares Soar on Captive Deal

0:00When your options are limited, so are your opportunities. At SIBO, the global exchange that pioneered options trading, we offer more ways to move with the market. From VIX and SPX options to global market data solutions, SIBO helps investors diversify, manage risk, and stay ahead of whatever the market does next. SIBO. Life is better with options. Your investments could be too. There are risks associated with SIBO Company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers. The thing about AI for business, it may not automatically fit the way your business works.

0:35At IBM, we've seen this firsthand. But by embedding AI across HR, IT, and procurement processes, we've reduced costs by millions, slash repetitive tasks, and freed thousands of hours for strategic work. Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business, IBM. This episode sponsored by Caraloja. What if your bed felt like a luxury beachside resort every single night? That's Caraloja. Caraloja bamboo sheets and bedding are designed for incredible softness. In fact, Oprah Daily says Caraloha sheets are like slumbering at a luxe beachside resort, and Good Morning America calls them softer and cooler than cotton.

1:25If better sleep is calling your name, start with Caraloha bamboo sheets. Sleep cooler, softer, and better with Caraloha. Go now to caraloha.com. That's C-A-R-I-L-O-H-A dot com. and try Caraloha Bamboo Sheets with free shipping over$100 and a 100-night trial. Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's talk Harley-Davidson. Now, John, you know, I bought a ride recently.

2:16You did not buy a Harley. Let's just make that clear. I bought a Vespa Piaggio scooter, 50 cc's of raw power. Oh, 50 cc's. So when you're driving down the road and the guy on a Harley-Davidson comes the other way, I wave. They don't wave back. I don't get the cool sign like you're a biker. You're not the same way. Joe Levington, he follows all the credit stuff for a lot of these industrial and transportation companies. He's the director of credit research for Bloomberg Intelligence. Harley-Davidson, stock is up 20 % here. What happened? Paul, you're on the Vespa. I would think you'd be coming out.

2:53Are you coming out of your Bentley while you do that? Yeah, I'm Vespa on the Jersey Shore. You can find me any day. That I believe. That I believe. Yeah, you know, the key for Harley isn't really their earnings, which were really, like, not great. But the potential, or not the potential, but a stake sale of their captive finance company, which came in at a much higher price than people were expecting, that's going to be used, or the proceeds are$1.25 billion with the proceeds used for a mix of share purchases, paying down debt, and also for capital investment. Okay, so when I go in to buy a Harley Davidson motorcycle at the dealership, I finance it through this part of Harley.

3:29That's exactly right. That's what they sold. Yes. Or that's part of what they're selling. Who's buying it and why? Sure. KKR and PIMCO are the buyers, each taking a 4.9 % stake. And really, they're buying it because that business has been a very profitable business for many, many years. It actually should be more than 50 % of Harley's overall profits. They actually make more money from the financing side than they do from manufacturing vehicles right now, which goes to the trouble that they're having on the manufacturing side. Or let's talk about the manufacturing side. What's the motorcycle market like these days?

4:05The motorcycle business isn't bad. I think the challenge with Harley is that it's kind of one of those melting ice cubes that sometimes you see in the media world that you would know well of. If you go back 10 years ago, the manufacturing side, its sales are down 13 % over 10 years. But the real issue is that the margins have gone from 20%, so they're making 20 cents on the dollar 10 years ago. now they make about five cents wow and so it's really the profitability and the erosion and not really playing to their strengths is that because they can't raise prices or they're costing on them well i think it's really they've kind of lost their way a little bit you know they were talking today about their six thousand dollar motorcycle that they're excited about you know and i know like it's the premium brand it's that iconic image of a harley it's that v8 engine playing to the electrician or the plumber, you know, the mechanic that has an$80 ,000 to$100 ,000 income and owns a Mustang, like that's who they should be playing to in that 40 to 60-year-old age range.

5:07Like that's their customer. But they've tried to move out into different segments of the marketplace and have really gotten hurt and eroded their image. But I can't think of a more American-made product anywhere than Harley Davidson. So are they immune from tariffs? Does that give them an advantage versus some of these Japanese brands? They're not immune from them, but they do have 25 % of their business in Europe and another 25 % in Asia. But really, the U.S. is where they're big and where they dominate. They just haven't done a great job of marketing to that person and putting engineering into that customer should i be more excited about harley davidson uh stock hog or harley davidson bonds well i just look at the bonds and i'm not that excited about the bonds but what i will say for them is that um they're going to remain investment grade after the sale uh and they trade very wide to their ratings um and so like that is an always an interesting combination that people look at what does that yield or what well they have a variety of issues But I would say that in general, they trade about 20 to 30 basis points wide of where their ratings are.

6:18So what a credit rater thinks. And usually bonds trade to what the raters think. How about you also cover the auto sector. How's the credit of the auto industry out there? Because this whole tariff situation, the uncertainty associated with transition to EVs. Like I just say to myself, every time I look at some of the stocks, I can't find a scenario to own any of the stocks. How about the bonds? Yeah, well, you know, it's interesting because the bonds are a different world, right? All of the issues that you see in autos apply to pretty much everybody except Ferrari, right? Whether it's tariffs or the EV transition being slower, maybe not actually happening in the US, all of these challenges still exist.

6:59But the difference between an equity investor and a bond investor is that your typical bond is three years of maturity, right? Because it's largely tied to the captive finance company, right? the financing of the loans and leases behind an auto. And so it's a much shorter term way of thinking, you know, can I get my money back in three years supported by a vehicle which will have a residual value to it? It's a little different than saying like, hey, 10, 15 years out, what's my discounted cash flow? So it's a very investable side from the credit side, maybe not as much on the equity side. Will they tell us more about the future?

7:33Can it serve as kind of a canary in the coal mine for a company, looking at that end of it? At the captive side? Yeah. Yeah, well, it's very short-term-sighted, right? So you have to, you know, for all of the treasurers and CFOs that are out there and CEOs, they're thinking long-term and where can I take my company? How can I grow it into something bigger and more meaningful? A bondholder just wants to get paid back. That's right. See, this is where I learned. Different outlook. Equity is soft. Debt is hard. You can always tell me to go take a walk. Is that why we call it the smart money? It is.

8:07It's a smart money. And they tend to be pessimists in general, whereas the equity people were always glass half full. This is what could go right. For these guys, the whole world is what could go wrong. So anyway, Joel Levington, one of the best global director of research, Bloomberg in intelligence, covering all that autos, industrials, transportation, all that kind of stuff from the credit perspective. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube.

8:41John Tucker, Paul Sweeney, live here in our Bloomberg Interactive Broker Studio, streaming live on YouTube. John, you know, with all this inflation over the last several years, I found myself at the supermarket buying more store-branded products. The white label stuff, right? But I'll tell you what I haven't. It's ketchup. I'm sticking with Heinz no matter what. I mean, that is ketchup to me. Ketchup, ketchup, however you play it. How does Jen say it? I don't know. Jen Bartaschus, she does this stuff for a living. She covers all the staples companies, the packaged foods companies. She also covers all the supermarkets, too.

9:15So if you want to talk inflation on the stuff we buy at the store, Jen Bartaschus is the person to talk to. She joins us from Princeton here. So, Jen, Kraft Heinz, they put out some numbers that show they still have some price power out there in the marketplace, don't they? They do, Paul. And it was, by all things considered, it was a pretty decent quarter for Kraft Heinz. But they're still in progress of trying to really turn around and accelerate parts of their business. And although Ketchup is a brand where a lot of people have a lot of loyalty, there are a lot of other parts of their portfolio where they're still really trying to invest to regain consumer uptake of their products.

9:52What's like a growth area for this business? Like AI-powered mustard? Yeah, as funny as it sounds, one of the really interesting things about AI with regards to food companies is that it's really allowing and unlocking and an acceleration of innovation. And so although it's a little bit tongue in cheek, for Kraft Heinz, one of the big areas of focus for them is the flavors. And that's the sauces, because right now consumers like things. They like different taste experiences and sauce is a very easy and economical way to do that. So they've been really pushing the accelerator in that area. All right.

10:30You go to any restaurant, diner, USA, it's kind of at your booth would be ketchup, mustard, maybe. That's basically it. Now, what's there? What's a staple? As much as ketchup is, is hot sauces. Oh, really? Yeah, okay. The kids are doing hot sauces. I don't get it. I mean, they put it on everything. And they got it at their desks at work. What is this? Jen, talk to us about this hot sauce thing. Where did that come from? Well, you know, there's a real generational shift in terms of flavor profiles that consumers like. And what we see is that in younger generations, spicy, the balancing of sweet and spicy or salty and sweet, those kind of inner, those kind of dual type taste flavors are things that younger generation really are into.

11:17And they're showing, they're backing that up with the way they're buying, whether it's how they're consuming it in restaurants or what they're buying when they are purchasing and things to make at home. And that's why you see other companies like McCormick really doubling down on spice and flavor. And the hot sauces are doing really well for them as well. And in terms of moderating rate of inflation, well, I haven't seen it at the food town. I'm paying more for everything, including, it seems Heinz products. Am I right? You are right with regards to certain categories. I will say retailers are pretty good about trying to bring down prices where they can as quickly as they can because they really are trying to get consumers to value them in terms of being loyal to their retail operations.

12:05But inflation has been persistent, and commodity costs are down from previous highs, but they're still elevated relative to historic levels. That means that these companies have absorbed a lot and don't have a lot of room to absorb more. So there is still some selective price increases that are going through. Tomatoes are a unique category because we're looking at prices going up for tomatoes through the end of the year because of some trade agreement changes that have happened. Well, if you're in New Jersey, you've got to grow your own. We've got to grow your Jersey tomatoes, sure. Hey, Jen, I mean, you are the expert.

12:40When someone asks me, like, hey, who bears the brunt of these tariffs? is it the importer? Is it the, you know, the packaged goods company? Is it the supermarket? You cover pretty much all of that, Jen. How do you explain it to people? Like, where are those cost increases get born? So, I think there's a little bit of a distribution across the whole supply chain. And so, everybody's taking a little bite of it. But that also includes consumers at the end of that chain. The problem with that, and so, you If a retailer is negotiating, they're negotiating with their packaged food counterparts, they're absorbing a little bit of cost.

13:19But ultimately, the consumer has to pay a little bit more as well because there's been so much inflation over the last couple of years that there's just no more bandwidth to absorb it and to protect and shield consumers from it. So it is inevitable that price increases and inflation is going to hit that end consumer. We just haven't really seen the full brunt of the tariff impact yet because of all of the delays and the implementation and things like that. We're really expecting to see that tick up in the second half. For a company like Kraft Heinz, is there some sort of dividing line or are they just kind of experimenting in terms of like eating the costs, the impact on the margins and raising prices for consumers?

13:58How does that work? They're really looking at it in a very targeted way. So it's more like category by category or even sometimes product by product. Areas where you want to make sure that you have at least part of your product portfolio that preserves value for consumers. So that means not changing the pack size. That means not changing the price, but being selective and maybe increasing the price somewhere else in your portfolio to sort of offset that. So it's a big balancing act. One of the really great things that's come out in the last couple of years is that through AI and through big data, these companies have gotten much more sophisticated in how to maintain that balance.

14:36And so that's actually really helped in why we've seen some of the margin expansion that we've seen, at least the gross margin line, for some of these companies in the last couple of years. Jen, 30 seconds left here. Are they going to split this company up? Weren't we talking to you about this a week or two ago? Yeah, they're exploring strategic options. And I think one of the big obstacles is that what was rumored out there in the press was that they were going to spin the bulk of their grocery business into some other entity. The problem is they've tried to sell a bunch of these brands already and have been unsuccessful in doing so.

15:09So the question is, can they do this in a way that bundles it, creates value for shareholders, and still gives them the returns that they think they deserve for the brands that they're looking to sell? All right. I looked at the comp function, C-O-N-P for Kraft Heinz last five years, compounded annual return for this stock. Wait for it. 1 % per year. That's it. But on the flip side, they do pay a dividend yield of 5.5%. So you're getting all in about 6.5%. That's basically it for that part of the world. I don't know. And you pay a PE of 10 times earnings. That's kind of the story for a lot of that stuff in the consumer stable space.

15:45Looking for more investing options? Meet SIBO, the exchange that pioneered options trading. With exclusive trading products like VIX and SPX options, SIBO can help you trade in any market environment. There are risks associated with SIBO company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers. This is the Bloomberg Tech Minute brought to you by ChatGPT. Now with ChatGPT work. I'm Carol Masser. Walmart has become a major player in the burgeoning business of quickly fueling electric vehicles, speeding past Costco as well as more established charging companies.

16:19Bloomberg's Kyle Stock writes, as of June, Walmart has opened about 46 high-speed public charging stations with 380 cords. There are now EV chargers at about 326 of its U.S. stores, including adding this year four high-speed charging stations in Bentonville, Arkansas, even though the state has been a laggard in transitioning to electric vehicles. Walmart has hosted chargers from other companies since 2018. The big difference now? Walmart is building its own network, and quickly. As of March of last year, every EV station at a Walmart is under the company brand. Now, Walmart is still a blip on the U.S.

16:58charging map, and yet it was second only to Tesla among charging networks expanding in the second quarter. That's the Bloomberg Tech Minute brought to you by ChachiPT. Put ChachiPT to work on your most ambitious ideas and projects. Get started at ChachiPT.com today by selecting Work Mode, available on Plus and Pro plans. This episode sponsored by Caraloja. What if your bed felt like a luxury beachside resort every single night? That's Caraloha. Caraloha bamboo sheets and bedding are designed for incredible softness. In fact, Oprah Daily says Caraloha sheets are like slumbering at a luxe beachside resort, and Good Morning America calls them softer and cooler than cotton.

17:46If Better Sleep is calling your name, start with Caraloha bamboo sheets. Sleep cooler, softer, and better with Karaloja. Go now to karaloja.com. That's C-A-R-I-L-O-H-A dot com. And try Karaloja bamboo sheets with free shipping over$100 and a 100-night trial. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's get back to the restaurant business. I know the restaurant business. I mean, I'm not sure about this whole trip.

18:29You should go to restaurants. I'm in a restaurant almost every single day here, so I know what's going on out there. Michael Halen, he really knows what's going on with the restaurant business. He covers all the restaurants and the food services companies for Bloomberg Intelligence. Starbucks. Big turnaround story, Mike. Is it working? You know, there was some positive points that Brian Nickel hit on last night. You know, the fact that their value perception scores are the best they've been in two years and hourly turnovers down to 49 percent, which is actually phenomenal in the restaurant industry.

19:03Service times are improving. Customer satisfaction is up. Customer complaints are down. So with a small beat on the U.S. same-store sales and some of these positives he's pointing to, it's given bulls some confidence that a turnaround in its biggest market is near. What counts as innovation when you're basically selling coffee? Well, yeah, restaurants tend to get some shade by calling new menu items innovation. I'd say one of the more innovative products they're going to have is protein cold foam. Cold foam sales were up 23 % in the quarter, so they're going to launch new protein cold foam, and that's part of a broader initiative to sell healthier IDAM.

19:53Protein what? Cold foam. Cold foam. Hey, do they have matcha? Isn't that what the kids are drinking? Is it AI-generated? Is it AI-generated? So they do have matcha. I know they're going to try to implement some, debut some healthier food items as well, because typically their offerings are pretty unhealthy generally. You know, they made an effort to remove dyes and high fructose corn syrup and stuff like that. And so they're going to continue to move towards, you know, healthier options. Hey, Mike, let me ask one question here on tariffs. How do your companies, how are they exposed and how are they dealing with it?

20:33What are you hearing from your companies? You know, we're not hearing much because most of them don't have much exposure. You know, Starbucks is one we're probably we're watching most closely because of because of coffee. Right. And the impacts that tariffs can have on coffee prices. But Starbucks and all the other coffee chains that we follow are sourcing from many different countries. But, you know, the restaurant business, most of the companies, all of the companies are primarily sourcing their product. in the countries that they're operating in, right? And so most companies, you know, 90 % plus of the items that they're sourcing are coming domestically.

21:14All right, let's go Wings, baby. Wingstop, stock's up 24%. John Tucker and I have never been to Wingstop. We're going to the one on West 55th Street after the show here. What's going on at Wingstop? Yeah, so Wingstop had a phenomenal year last year, and the stock had a bumpy time over the last, we'll call it eight, nine, ten months, because investors knew that there was going to be a top and bottom line slowing this year. What happened today, the top line slowing was a lot less than expected. Net unit growth was better than expected. I mean, these stores are generating 70 % cash-on-cash returns for their franchisees.

21:55People are lining up to open new stores. And the same-store sales decline was a lot less than expected, just about a percent, lapping a plus 24 from last year. So less bad equals a lot of optimism around Wingstop, especially around the smart kitchen rollout. Smart kitchen rollout? Yeah, smart kitchen rollout. There we go, that AI theme again. There we go, yeah. And so those kitchens are, you know, are improving the service time significantly, making the jobs easier for the employees. And it's actually driving better traffic and sales four months after implementation. All right. The West 55th Street, Manhattan store.

22:41Better get ready. John Tucker and I are coming over. Michael Halen, thanks so much for joining us. Michael Halen covers all the restaurants for Bloomberg Intelligence. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. John Tucker and Paul Sweeney, we're live here in our Bloomberg Interactive Broker Studio. We're streaming live on YouTube as well. Head over there and search Bloomberg Live Radio, and that's where you'll find us here.

23:11Tesla in the news yet again, but this is for just a more mundane kind of business piece of news. Tesla's agreed to buy, go into a battery supply pact with a company called LG Energy. $4.3 billion worth of batteries there. I want to see what that means for Tesla. What it means for just kind of this continuing transition to electric vehicles. We need batteries. We need charging stations, all that kind of stuff. Steve Mann joins us, Global Autos and Industrial Research Analyst for Bloomberg Intelligence. Steve, talk to us about this deal between Tesla and LG Energy. What is Tesla signing up for here?

23:48Well, Tesla does have a pretty sizable energy storage battery business. So basically, these batteries are usually used at data centers, used at various utility power generation sites to kind of even out power production between the peaks and valleys of usage. So it's a sizable business and more importantly it is mundane but it's a very profitable business. So it's a 30 % gross margin compared to cars that they make today. They're about low teens. So at least double the gross margin. So very profitable and the LG deal sounds really promising for that business going forward. All right, so this has nothing to do with putting LG's batteries in Tesla's electric vehicles.

24:48No, no. I mean, I can't get excited about cars, I've got to admit. But what I can get excited about is saving money. And if I have batteries that store electricity when electricity rates are lower, say, in the overnight hours, yes, that excites me. How big of a business potentially is this going forward? Yeah, you can actually, consumers, also consumers can actually buy those batteries and install them in their house, in their garage, and maybe link that up to a bunch of solar panels on the roof. Consumers, in some cases, can effectively not even have to pay. They can actually make money selling power back to the utilities.

25:36Nice talking. Steve, the number one issue continues to be just demand out there for Tesla products and deliveries and things like that. Anything new that you can tell us here about kind of what you're hearing out there? Yeah, on the car front, you know, earnings are going to be pretty volatile. I think in the next few quarters, I think, as many know, the 7500 EV tax credit is going away at the end of September. So we should see a surge of demand, not just for Tesla, but the whole EV market here in the U.S. between now and September. And Tesla is going full out in meeting that demand. I think they've actually built a little bit of inventory even before this quarter to meet that demand.

26:24But then we can see demand fall off in the fourth quarter and into the first half of 2026. Now, the question is, can Tesla roll out their cheaper vehicle and hopefully create some demand for that vehicle to offset the falloff and the overall falloff in demand from the elimination of the tax credit? Is Elon back focusing on his companies? Yes, it seems like it. He hasn't been really tweeting a lot on the politics. And I think various channels within the social media have indicated that he is focused. And I think he himself has said on social media that he is full on in managing Tesla and as well as his other businesses.

27:19All right, Steve. Thanks so much for that quick update. Appreciate it. Steve Band, Global Autos and Industrials Research Channel, Bloomberg Intelligence. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.