It’s Time To Get Piggish On Harley Davidson (NYSE: HOG)

Citi Sets Street High Price Target For Harley Davidson

One of the many adages driving stock market sentiment is the idea that pigs get fat and hogs get slaughtered. What this means is that when the time is right it’s OK to be a little greedy with your investments or trading so long as you don’t forget about the risk. Being a little piggish can help make your account fat, get hoggish (otherwise known as aiming for the fences, shooting for the stars etc) will set you up for a fall. Sooner or later your trade will turn against you and wipe out your account.

My point is that, in regards to Harley-Davidson (NYSE: HOG), to time to get a little piggish is at hand. Yesterday, Citi initiated coverage on HOG and sparked a rally that drove the stock up by more than 7.0%. In today’s action, shares of HOG are giving up some of the gains but that is to be expected. What this means for investors is an opportunity to put some new money to work in a high-yielding stock.

The Analysts Community Has Only Begun to Warm Up

Citi initiated coverage of Harley-Davidson with a buy setting the Wall Street high-price-target. Their target, $33, represents a 33% increase from Tuesday’s open and the consensus target of $25. Considering the outlook and yield at Harley this situation sets the stock up for one of two things. Either Citi is offbase on their rating of Harley or the rest of the analyst’s community is about to play a game of catch-up with their ratings.

The average rating on Harley is neutral with a bullish bias which suggests the analysts feel owning Harley if not accumulating it is the right thing to do. Of those, there are 13 holds and only 2 bears which will provide a lot of fuel regarding an analyst-driven price rally. Regarding the outlook for earnings, Harley-Davidson is expected to report a marked down-turn in revenue and earnings for the fiscal period ending December 2020 but a strong rebound is expected. Next year, revenue and earnings are expected to grow 13% and 90% from the current and approaching their pre-COVID levels.

Is The Consensus Wrong?

There is growing evidence that the consensus for earnings from Harley-Davidson this year is wrong. Not only are there a growing number of companies reporting better-than-expected there is one, specifically, that suggests Harley-Davidson could be seeing some strength as well. Winnebago. Now I know that Winnebago and Harley-Davidson produce far different products but they do have one thing in common; the outdoors.

Winnebago has seen a strong uptick in demand due to the COVID pandemic and social distancing that will be seen among other outdoor-oriented brands. Vroom (NYSE: VRM), is another automotive stock moving higher on outlook following bullish analyst activity.

In addition, Harley-Davidson is on the cusp of a major turn-around. The company recently appointed Jochen Zeitz to the post of CEO, Zeitz is noteworthy for his successful rescue of Puma SE. Not to mention that the turn-around is central to Citi’s buy-rating and price target thesis.

Don’t Forget About The Dividend, It’s Juicy

Harley-Davidson is not a Dividend Aristocrat, it’s got 0 years of consecutive increases to boast, but it does have a long history of semi-regular distribution increases. At today’s trading level, near the Wall Street consensus, the stock is yielding nearly 4.75% which makes it quite attractive in light of the rebound/turnaround outlook. The payout ratio for this year is a bit high, running near 90%, but that is based on a consensus estimate I think too-low and mitigated by the balance sheet.

The company has a bit of debt on the balance sheet, the debt to equity is fairly high and running over 400%, but it’s not a worry. The company’s cash position, cash flow, free cash flow, and coverage ratios more than offset any worry caused by the debt. Looking forward, the payout ratio in 2021 will drop to sub-50% levels which put the company in a position to at least begin considering another distribution increase.

The Technical Outlook: Buy, Buy, Buy!

The technical outlook for Harley-Davidson is strong. By strong I mean it is on the cusp of firing a very strong buy signal that is only held back by one thing, the MACD. Price action has been trending higher since hitting the March bottom, price action is confirming the short-term moving average, the stochastic is firing a strong signal, and it’s all supported by the fundamentals so I think higher prices are inevitable. The first target for resistance is the recent high of $27.50, once that is broken the next reasonable technical target is just shy of Citi’s $33 price target.