Can Harley Inventory Bounce Again To $50 Following Charge Cuts

Harley-Davidson stock (NYSE:HOG) at present trades at about $38 per share, round 22% beneath its ranges of $50 seen on Could 17, 2021 (pre-inflation shock excessive), and seems to be undervalued. Alternatively, automotive main Ford inventory (NYSE:F) is down by about 10% over the identical interval. Harley noticed its inventory buying and selling at round $31 on the finish of June 2022, simply earlier than the Fed began growing charges, and stays up by about 26% from these ranges pushed by easing inflation numbers. As compared, the S&P 500 gained about 45% throughout this era. Harley’s underperformance has been partly pushed by inflation and excessive rates of interest lately, which have made financing costlier for patrons of bikes and cars.

Trying over an extended interval, Harley inventory has seen some good points. Nevertheless, good points during the last 3-year interval have been removed from constant, though annual returns have been significantly much less risky than the S&P 500. 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 risky. And it has outperformed the S&P 500 every year over the identical interval. Why is that? As a bunch, HQ Portfolio shares supplied higher returns with much less threat versus the benchmark index; much less of a roller-coaster journey as evident in HQ Portfolio performance metrics. Given the present unsure macroeconomic atmosphere round charge cuts and a number of wars, may HOG face an analogous scenario because it did in 2021 and 2023 and underperform the S&P over the following 12 months – or will it see a robust bounce?

Returning to the pre-inflation shock stage implies that Harley inventory should acquire about 28% from right here. A number of elements may drive Harley’s inventory larger. The Fed minimize rates of interest by 50 foundation factors this week, marking the primary charge minimize in near 4 years.  With the present benchmark federal funds charge standing at 4.75% to five% put up the minimize, there stays important room for the central financial institution to decrease borrowing prices additional. The speed minimize may assist make car financing extra inexpensive, lowering month-to-month funds and inspiring potential Harley patrons who’re on the fence to maneuver ahead with their purchases.  Furthermore, Harley has additionally been seeing comparatively sturdy demand for its mannequin yr 2024 autos together with its Touring Bikes. The corporate’s Q2 2024 outcomes have been additionally higher than anticipated, with adjusted internet earnings rising by 34% yr over yr to $1.63 per share, whereas gross sales expanded 12% from the prior-year quarter to $1.62 billion. Nevertheless, we estimate Harley Davidson valuation to be round $43 per share, about 12% above the market value, given Harley’s combined observe file of promoting to the following technology of riders as its core millennial buyer base ages. Our detailed evaluation of Harley-Davidson upside post-inflation shock captures tendencies within the firm’s inventory in the course of the turbulent market circumstances seen lately and compares these tendencies to the inventory’s efficiency in the course of the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: A rise in cash provide to cushion the influence 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 availability
• April 2021: Inflation charges cross 4% and enhance quickly
• Early 2022: Power and meals costs spike as a result of Russian invasion of Ukraine. Fed begins its charge 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 charge hike course of; enhancing market sentiments assist S&P500 recoup a few of its losses.
• Since August 2023: the Fed has saved rates of interest unchanged to quell fears of a recession.
• September 2024: The Fed minimize its benchmark charge by 0.5% and signaled extra cuts coming this yr.

In distinction, right here’s how HOG inventory and the broader market carried out in the course of 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 akin 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 virtually 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 succeed in 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 influence of Covid-19 on bike gross sales. Nevertheless, gross sales rose to $5.3 billion in 2021 and to about $5.84 billion in 2023 as demand picked up and likewise as provide chain points steadily eased. Internet earnings declined from round $531 million in 2018 to simply about $1 million in 2020, though it rose to about $707 million in 2023. The corporate’s monetary place can also be fairly sturdy with the corporate holding $1.8 billion in money as of the latest quarter. 

Conclusion

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

Whereas buyers have their fingers crossed for a gentle touchdown by the U.S. economic system, how unhealthy can issues get if there’s 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 9/19/2024
[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.