Does Harley-Davidson Stock Have Upside At $36?

[Updated 03/05/2021] Harley-Davidson Update

At the current price of $36, Harley-Davidson’s stock (NYSE: HOG) has moderate upside in the near term. Harley-Davidson, a global motorcycle manufacturer saw its stock rise by 5.6% from 2018 to now, compared to the S&P 500 which has gained 54% since the end of 2018. The company has seen revenues falling in recent years while its P/S ratio has risen. Our dashboard ’Buy or Sell Harley-Davidson’s Stock’ has the underlying numbers.

During the Covid-19 crisis, Harley-Davidson saw revenue fall by 24% in 2020 to $4.1 billion, while earnings per share fell to $0.01 compared to $2.70 in the previous year. The fall was primarily due to Covid-19 restrictions and a fall in discretionary spending.

We expect Harley-Davidson’s revenues to rise by 22% to $5 billion in 2021. Further, its net income is likely to grow to $194 million as recovery post Covid-19 gains pace, increasing its earnings to $1.27 which coupled with the P/E multiple of 32x will lead to Harley-Davidson’s valuation of around $41, which is nearly 14% above its current market price.

[Updated 05/11/2020] Harley-Davidson Stock Expensive At $20?

After a roughly 40% decline since the beginning of the year, we believe Harley-Davidson (NYSE: HOG) stock is fairly priced at around $20. We believe the stock is unlikely to see an upside anytime soon considering the impact of the ongoing coronavirus crisis and its effect on the automobile sector. Notably, Harley-Davidson’s stock had not fallen below $24 for nearly a decade since 2010 but sank to a low of $14 this March due to the coronavirus pandemic. In Q1 2020, Harley-Davidson’s revenues fell 6.2% y-o-y, with retail sales falling 17.7% (15.5% decline in the U.S. and a larger 20.7% fall in international markets). Further, we believe that the U.S. market will report significantly worse numbers in Q2 2020, as the impact of the coronavirus was largely seen from mid-March. The company’s stock has been under pressure for several quarters now – with earnings shrinking for full-year 2019 and investors already assigning a lower P/E multiple to the company at the end of 2019. The ongoing crisis has only made things worse for the company.

The stock price fall from $47 at the end of 2017 to $37 at the end of 2019 is justified by the roughly 5.1% decrease in Harley-Davidson’s revenues from 2017 to 2019. This was accentuated by a decrease in Net income margin from 9.2% in 2017 to 7.9% in 2019. As a result, the net income figure fell from $521.8 million in 2017 to $423.6 million in 2019. The fall of 10.9% in EPS was partly offset by a decrease of 8.9% in shares outstanding. But as we pointed out earlier, the stock price decline was fueled by a sizable decline in HOG’s P/E multiple – which fell from 15.3x at the end of 2017 to 13.6x at the end of 2019. This reflects an 11.4% fall from the end of 2017 to the end of 2019. The multiple has dropped to 7.6x currently, which reflects a 50.7% decrease from the end of 2017 to May 2020.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. HOG’s stock is down by about 38.8% since January 31, after the World Health Organization declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 10.7%. Moreover, about 70% of HOG’s total revenue comes from the U.S. region, which has been hurt the most by the outbreak. Lower consumer spending and consumption would lead to lower demand for automobiles, including motorbikes – affecting HOG’s revenues.

For Q1, Harley-Davidson has already seen an overall fall in retail sales by 17.7%, and we expect the Q2 results to further this trend as the U.S. region started seeing the effects of the pandemic from March. The Q2 results are also likely to accompany a lower Q3 as well as FY’20 guidance. If there isn’t clear evidence of the containment of the virus at the time of the earnings announcement, we believe there is a possibility that HOG’s stock could see a further downside. However, if there are signs of abatement of the crisis by the time Q2 results are announced, the company’s stock could see a slight uptick. For now, we believe Harley-Davidon’s stock is likely to remain around its current levels.

While Harley’s stock may have moved, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Tesla vs. Cigna shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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