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Bear of the Day: Harley-Davidson (HOG)

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Jeremy Mullin
·4 min read
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Harley-Davidson (HOG) is a Zacks Rank #5 (Strong Sell) that is a popular motorcycle manufacturer. The company operates in two segments, Motorcycles and Related Products and Financial Services. The motorcycle segment represents 80% of their revenues and is the primary driver of earnings growth.

Unfortunately for investors, there wasn’t much growth this past quarter. The company disappointed on EPS and the stock was crushed. As we approach the summer driving season, investors are left with hope that the motorcycle consumer will come back strong with their stimulus checks. However, there might be more of a fundamental issue at hand.

More about HOG

Harley-Davidson is and iconic American brand that was founded in 1903 in Milwaukee, Wisconsin. The company is valued around $5 billion and has a PE of 14. HOG has Zacks Style Scores of “A” in Value but “D” in Growth. Harley pays a small dividend of 0.24%.

There is no questioning Harley's influence in Americana over the years, but that doesn’t help its stock price today. Earnings last week forced the stock over 20% lower the day they reported.

Q4 Earnings

Before this quarter, Harley has missed on EPS only twice since 2019. The surprise miss last week wasn’t necessarily surprising, but the magnitude was, with a 730% EPS miss. The company lost 44 cents instead of the expected +.10 and revenues came in below expectations as well. Both U.S. and international sales were down year after year and the operating margin hurt, coming in at -37% vs the -5.3% last year.

While the numbers may seem like a disaster, the company unveiled “The Hardwire” a five-year strategic plan that will target profitable growth and brand desirability. In this plan the company will target low double-digit EPS growth through 2025 by broadening the view of its costumer, investing in core segments and strengthen its commitment to electric motorcycles.

Management obviously has identified the issues and had comments going forward:

“The entire Harley-Davidson team put forth tremendous effort in 2020 and we now have the right organization, structure and strategy in place to make step changes in our performance and enhance our position as the most desirable motorcycle brand in the world.”

While there is a plan, analysts and investors might not be on board yet. The company will have to prove itself in upcoming quarters as for now, estimates are falling.

Estimates

The quarter forced estimates lower over all times frames. The last 7 days have seen next quarters estimates fall from $1.20 to $0.90, or 20%. For the current year, estimates dropped from $2.76 to $2.34, or 15%.

The drop in estimates led to price cuts from Wedbush ($42 from $45) and BMO ($40 from $46).

A Fundamental Issue

The motorcycle industry has gone through hard years as late, with sluggish sales being blamed on more risk-averse millennials. There simply aren’t enough new riders to replace the older riders that supported the industry for so long. Motorcycles simply aren’t as cool as they used to be. For those with the disposable income that might have taken up the idea thirty years ago, they are not riding or buying into the brand.

But perhaps the end of COVID might change everything. The idea of getting out on the road after being stuck in your house for a year might sound great for some new customers. Harley and other motorcycle companies need to market and sell that idea if they want to change the trend away from bikes.

The Technicals

The chart looked great before earnings, but the down move broke some key levels. The $30 area is the 200-day Moving average and investors that think the company can turn things around should eyeball that level. Back over $40 would indicate the bulls know something the bears don’t, so let’s assume if the stock can get back there, The Hardwire plan is working

In Summary

Its going to take a while for the company to prove itself, so for now investors should consider this stock dead money. It is hard not to root for a brand like Harley, as the iconic American image has so much value in itself. Everyone loves a turnaround story, but be patient with this one and let the chart speak for itself.

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