Will Harley-Davidson Stock Return To Pre-Inflation Shock Highs?

Harley-Davidson stock (NYSE:HOG) currently trades at $33.50 per share, around 36% below its level of $52 seen on May 17, 2021 (pre-inflation shock high), and seems undervalued. Harley saw its stock trading at around $32 at the end of June 2022, just before the Fed started increasing rates, and remains up by roughly 6% from those levels. In comparison, the S&P 500 gained about 18% during this period. Harley stock has benefited from better-than-expected Q2 revenues and easing supply chain issues. 

Notably, HOG stock had a Sharpe Ratio of -0.1 since early 2017, which is lower than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Returning to the pre-inflation shock level means that Harley stock will have to gain about 55% from here. While it’s possible that the stock may recover to those levels, we estimate Harley Davidson valuation to be around $46 per share, about 37% above the market price. This is because the recent uncertainty in the financial sector has made investors concerned about a potential recession. Harley’s business may see an adverse impact on its volume if the U.S. economy were to go into recession, with customers holding back on discretionary purchases.

Our detailed analysis of Harley-Davidson upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: An increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how HOG stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

HOG and S&P 500 Performance During 2007-08 Crisis

HOG stock declined from nearly $46 in October 2007 (pre-crisis peak) to $10 in March 2009 (as the markets bottomed out), implying that HOG stock lost almost 78% of its pre-crisis value. It recovered from the 2008 crisis to levels of around $25 in early 2010, rising roughly 150% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

HOG Fundamentals Over Recent Years

HOG revenues declined from around $5.7 billion in 2018 to about $4 billion in 2020, due to the impact of Covid-19 on motorcycle sales. However, sales rose to $5.3 billion in 2021 and to about $5.7 billion in 2022 as demand picked up and also as supply chain issues gradually eased. Net income declined from around $531 million in 2018 to just about $1 million in 2020, although it rose to about $741 million in 2022.

Conclusion

With inflation easing and the Fed going slightly easy on the pace of its interest rate hikes, market sentiment is improving. We believe that this could help Harley-Davidson  (HOG) stock to an extent.

[1] Month-to-date and year-to-date as of 9/13/2023
[2] Cumulative total returns since the end of 2016