Can Harley Inventory Bounce Again Regardless of Powerful Earnings?

Harley-Davidson stock (NYSE:HOG) at the moment trades at about $33 per share, round 33% under its ranges of $49 seen on Could 17, 2021 (pre-inflation shock excessive), and seems to be undervalued. Harley noticed its inventory buying and selling at round $30.50 on the finish of June 2022, simply earlier than the Fed began growing charges, and stays up by about 8% from these ranges pushed by easing inflation numbers. As compared, the S&P 500 gained about 53% throughout this era. Harley’s underperformance has been partly pushed by elevated inflation and excessive rates of interest in recent times, which have made financing dearer for consumers of bikes and cars. Shopper sentiment has additionally been blended, and this has weighed on gross sales of Harley’s iconic motorbikes. Harley’s Q3 earnings report was additionally blended. Whereas income for the quarter declined 26% to $1.15 billion, internet revenue was down 40% year-over-year. North American retail gross sales declined 10%, whereas international retail gross sales have been down by roughly 13%. The corporate additionally lowered its full-year steering.

Trying over an extended interval, the efficiency of HOG inventory with respect to the index over the past 3-year interval has been fairly unstable. Returns for the inventory have been 4% in 2021, 12% in 2022, and -10% in 2023. In distinction, the Trefis High Quality (HQ) Portfolio, with a group of 30 shares, is much less unstable. And it has outperformed the S&P 500 every year over the identical interval. Why is that? As a gaggle, HQ Portfolio shares offered higher returns with much less threat versus the benchmark index; much less of a roller-coaster trip as evident in HQ Portfolio performance metrics. Given the present unsure macroeconomic setting round fee cuts and a number of wars, may HOG face an analogous state of affairs because it did in 2021 and 2023 and underperform the S&P over the following 12 months – or will it see a powerful bounce?

Returning to the pre-inflation shock stage signifies that Harley inventory should acquire about 50% from right here. A number of elements may drive Harley’s inventory larger. The Fed minimize rates of interest by 50 foundation factors final month, marking the primary fee minimize in near 4 years.  With the present benchmark federal funds fee standing at 4.75% to five% publish the minimize, there stays important room for the central financial institution to decrease borrowing prices additional. The speed minimize may assist make automobile financing extra reasonably priced, decreasing month-to-month funds and inspiring potential Harley consumers who’re on the fence to maneuver ahead with their purchases.

Furthermore, Harley has additionally been seeing comparatively robust demand for its mannequin yr 2024 automobiles together with its Touring Bikes.  Nonetheless, we estimate Harley Davidson valuation to be round $43 per share, about 35% above the market value, given Harley’s blended monitor document of promoting to the following era of riders as its core millennial buyer base ages. Our detailed evaluation of Harley-Davidson upside post-inflation shock captures traits within the firm’s inventory through the turbulent market situations seen in recent times and compares these traits to the inventory’s efficiency through the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: A rise in cash provide to cushion the impression of lockdowns led to excessive demand for items; producers have been unable to match up.
• Early 2021: Delivery snarls and employee shortages from the coronavirus pandemic proceed to harm the provision
• April 2021: Inflation charges cross 4% and improve quickly
• Early 2022: Vitality and meals costs spike as a result of Russian invasion of Ukraine. Fed begins its fee hike course of
• June 2022: Inflation ranges peak at 9% – the very best stage in 40 years. The S&P 500 index declined greater than 20% from peak ranges.
• July – September 2022: Fed hikes rates of interest aggressively – leading to an preliminary restoration within the S&P 500 adopted by one other sharp decline
• October 2022: Fed continues fee hike course of; bettering market sentiments assist S&P500 recoup a few of its losses.
• Since August 2023: the Fed has stored rates of interest unchanged to quell fears of a recession.
• September 2024: The Fed minimize its benchmark fee by 0.5% and signaled extra cuts coming this yr.

In distinction, right here’s how HOG inventory and the broader market carried out through the 2007/2008 disaster.

Timeline of 2007-08 Disaster

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline similar to Lehman chapter submitting (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Preliminary restoration to ranges earlier than accelerated decline (round 9/1/2008)

HOG and S&P 500 Efficiency Throughout 2007-08 Disaster

HOG inventory declined from almost $46 in October 2007 (pre-crisis peak) to $10 in March 2009 (because the markets bottomed out), implying that HOG inventory misplaced nearly 78% of its pre-crisis worth. It recovered from the 2008 disaster to ranges of round $25 in early 2010, rising roughly 150% between March 2009 and January 2010. The S&P 500 Index noticed a decline of 51%, falling from ranges of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to achieve ranges of 1,124.

HOG Fundamentals Over Current Years

HOG revenues declined from round $5.7 billion in 2018 to about $4 billion in 2020, as a result of impression of Covid-19 on bike gross sales. Nonetheless, gross sales rose to $5.3 billion in 2021 and to about $5.84 billion in 2023 as demand picked up and in addition as provide chain points regularly eased. Web revenue declined from round $531 million in 2018 to only about $1 million in 2020, though it rose to about $707 million in 2023. The corporate’s monetary place can be fairly robust with the corporate holding $2.2 billion in money and money equivalents as of the newest quarter. 

Conclusion

With the Fed’s financial easing now underway, Harley’s inventory has the potential for positive aspects.

Whereas buyers have their fingers crossed for a delicate touchdown by the U.S. economic system, how unhealthy can issues get if there may be one other recession? Our dashboard How Low Can Shares Go Throughout A Market Crash captures how key shares fared throughout and after the final six market crashes.

[1] Returns as of 10/29/2024
[2] Cumulative complete returns because the finish of 2016

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The views and opinions expressed herein are the views and opinions of the creator and don’t essentially mirror these of Nasdaq, Inc.