Don’t Miss the Forest for the Trees with Harley Davidson (NYSE: HOG)

Harley Davidson NYSE: HOG is set to release its Q4 2020 numbers tomorrow; analysts are expecting another decline in retail sales, but the wind should be at Harley Davidson’s back in 2021 and beyond.

The motorcycle manufacturer is set to unveil its 2021-2025 strategic plan at the same time it releases its Q4 results. If the market is satisfied with the long-term plan and Q4 numbers come in above (low) expectations, HOG shares could have a second consecutive post-earnings surge.

After the Q3 numbers came out, HOG shares soared by more than 20%. The company’s EPS of $1.05 blew away analyst estimates of 28 cents a share. Revenue dipped 9.8% yoy, but the $964.8 million was more than $100 million above expectations.

Are Expectations Higher Than We Think for Q4?

Wall Street is expecting Harley Davidson to post a 12% decline in Q4 retail sales. Wedbush, which was so bullish on HOG back in October, is expecting retail sales to dip by a mid-to-high teen percentage.

Isn’t it possible that the whisper numbers are higher than the published estimates? Harley Davidson did report EPS that were nearly quadruple analyst estimates last quarter, after all.

Probably not. For two reasons:

1. Harley Davidson doesn’t have a recent history of beating analyst estimates. This is a company that was in a years-long downtrend until CEO Jochen Zeitz took charge in May 2020, not a scorching hot tech startup. In Q2 2020, for example, sales were nearly $100 million shy of analyst estimates.
2. Analyst estimates for EPS are down more than 10% over the last 30 days to $0.22 a share. If the whisper numbers were high, published expectations would likely remain stable – or start creeping up.

Though Harley Davidson has a good chance of clearing a low bar for Q4, it’s the 2021-2025 outlook that could really get investors excited tomorrow. Wedbush was a bit pessimistic about Harley Davidson’s Q4 prospects, but still maintained an outperform rating and $45 price target. You should take their lead and not miss the forest for the trees.

Sales Set to Rebound in 2021

Harley Davidson typically launches its new models in August or September, but the pandemic caused the company to push the 2020 releases to early 2021. That hurt HOG’s 2020 sales, but will boost the company’s Q1 and Q2 2021 sales.

How much of a boost will it be? That’s up for debate as management didn’t even offer guidance for Q4 2020, let alone Q1 2021 and beyond. What Harley Davidson has quantified, however, is its expected annual savings from its turnaround plan. Zeitz put that number at $115 million.

What Will Management Say About 2021-2025?

This is going to be a big part of Harley Davidson’s Q4 2020 conference call. Investors are hoping that the plan is ambitious andattainable.

Looking at recent actions, we can get an idea of what management will say about its 2021-2025 strategic plan.

In 2020, HOG eliminated 30% of its product line to focus on its best sellers. The company has signaled that it wants to be lean and mean moving forward. Harley Davidson can sell its bikes for high prices to its loyal, but shrinking, customer base, as long as it doesn’t flood the market. The company also eliminated 700 positions, which is responsible for a big chunk of that $115 million of expected annual savings.

The Price is Right

It’s very unlikely that Harley Davidson is going to go on a 4-5 year run where sales grow at a double digit CAGR. But that’s okay, because HOG is trading at less than 14x forward earnings.

Harley Davidson currently pays a quarterly dividend of 2 cents a share, after lowering the dividend from 38 cents a share in the early days of the pandemic. It was a wise move to cut the dividend in such uncertain times, but Harley Davidson should be able to reinstate that dividend later this year. The old dividend would equate to a 3.79% yield at current prices.

How Should You Play Harley Davidson?

Harley Davidson has nearly tripled since bottoming out in March 2020.

The earnings and dividend outlook can support higher prices though. There appears to be more to gain than to lose by getting in ahead of tomorrow’s report.