Harley-Davidson Skids Into A Buying Opportunity

The Analysts And Institutions Are Hanging On To Harley-Davidson

Harley-Davidson NYSE: HOG hit the skids following the Q1 earnings release but this is an opportunity to buy into an iconic American brand. The results were mixed, to be sure, but highlight both the current situation and the opportunity available in the second half of the year. While supply chain and inflationary headwinds took their toll on bottom-line results the company is optimistic the situation will change in the second half. Specifically, the product mix had a negative impact on the margin because the company could not meet demand due to microchip shortages. Microchip shortages and the ensuing component shortages are expected to ease through the end of the year and that will be a tailwind for sales, margins, and earnings. 

As for the analyst, no commentaries have been issued since the earnings release and there has been very little activity this year at all. The takeaway, however, is that 9 analysts are still rating the stock at a weak Buy with a price target that is almost 45% above the recent price action. Add in a very strong institutional ownership and we see a firm bottom in share prices at the $35 level. What this means in the near term is that shares of HOG are range-bound but there is a major catalyst in the works. Assuming that supply chain constraints do ease revenue and earnings should outperform the Marketbeat.com consensus and that could lead to renewed interest among the analyst and institutions. As it is now, the institutions own about 90%, and, although the buy/sell activity has been vigorous, the net of buying and selling is relatively flat. 

Harley-Davidson Misfires On Inflation 

Harley-Davidson had a good quarter verging on great if not for the impact of supply chain disruptions and inflation. The company produced $1.5 billion in net revenue for a gain of 5.6% over last year and beat the consensus by 1180 basis points. The strength was driven by sales in all channels but mix was affected by availability. The core HDMC segment grew by 6% but saw its operating margin contracted by 290 basis points. On the bottom line, the company reported a solid $1.45 in earnings but this is short of the consensus by a penny due to mix and increased costs. Looking forward, the company is expecting to recoup the lost margin, however, and is reaffirming the guidance, the only question is if these improvements will show up in the 2Q results or if the issues will get worse? 

Another tidbit that should keep the market interested is the planned spinoff of Livewire. Livewire is Harley-Davidson’s EV segment and it is expected to merge with a SPAC called AEA-Bridges by the middle of the year. The deal should drive considerable upside for shareholders as HOG is trading at only 8X its earnings while profitable EV companies like Tesla are trading closer to 80X. We don’t expect Livewire to trade at Tesla’s level of course but there is a significant opportunity for a multiple expansion relative to shares of HOG. 

The Technical Outlook: Harley-Davidson Is At Rock Bottom 

Price action in Harley-Davidson corrected over the last year and hit a new low early this year. The stock has since bottomed and reversed course but the price action remains tepid. The stock pulled back to firm support prior to and following the earnings release but we view this level, near $35, as rock bottom. Assuming we’re right, price action is likely to trend sideways over the next few weeks or months until there is positive evidence that supply chain constraints are getting better. If that comes, shares of HOG should begin moving higher.