Can Harley-Davidson Stock Rally 50% To Its Pre-Inflation Shock Highs?

Harley-Davidson stock (NYSE:HOG) currently trades at $35 per share, around 32% below its level of $52 seen on May 17, 2021 (pre-inflation shock high), and appears to be undervalued. On the other hand, Ford stock (NYSE:F) is down by about 12% over the same period. 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 close to 10% from those levels. In comparison, the S&P 500 gained about 48% during this period. Harley’s underperformance has been driven in part by inflation and high interest rates, which have dented consumer spending and made financing more expensive for buyers of motorcycles and automobiles. For perspective, over Q1 2024 Harley’s revenues declined 3% year-over-year to $1.73 billion, while earnings stood at $1.72 per share, down 16% compared to last year.

Looking at a slightly longer period, HOG stock has seen little change, moving slightly from levels of $35 in early January 2021 to around $35 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Overall, the performance of HOG stock with respect to the index has been quite volatile. Returns for the stock were 3% in 2021, 10% in 2022, and -11% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that HOG underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the megacap stars GOOG, MSFT, and AAPL.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could HOG face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

Returning to the pre-inflation shock level means that Harley stock will have to gain about 48% from here. There is optimism for a recovery, given that U.S. inflation has eased considerably in recent months with the Fed holding rates steady during its recent May meeting, with rate cuts remaining a possibility later in the year. However, we estimate Harley Davidson valuation to be around $43 per share, about 22% above the market price, given Harley’s mixed track record of selling to the next generation of riders and also with its electric bikes seeing tepid uptake.  Our detailed analysis of Harley-Davidson upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen in recent years 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
• October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.
• Since August 2023: the Fed has kept interest rates unchanged to quell fears of a recession, with rate cuts remaining a strong possibility in 2024.

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 $5.84 billion in 2023 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 $707 million in 2023. The company’s financial position is also reasonably strong with $746 million in long-term debt (excluding the debt for the financing division), and over $1.5 billion in cash as of the most recent quarter. 

Conclusion

With the Fed stopping its interest rate hikes and planning on rate cuts for 2024, Harley’s stock has the potential for gains.

[1] Returns as of 5/28/2024
[2] Cumulative total returns since the end of 2016

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