Can Harley Stock Bounce Back Despite Tough Earnings?

Harley-Davidson stock (NYSE:HOG) currently trades at about $33 per share, around 33% below its levels of $49 seen on May 17, 2021 (pre-inflation shock high), and appears to be undervalued. Harley saw its stock trading at around $30.50 at the end of June 2022, just before the Fed started increasing rates, and remains up by about 8% from those levels driven by easing inflation numbers. In comparison, the S&P 500 gained about 53% during this period. Harley’s underperformance has been partly driven by elevated inflation and high interest rates in recent years, which have made financing more expensive for buyers of motorcycles and automobiles. Consumer sentiment has also been mixed, and this has weighed on sales of Harley’s iconic motorbikes. Harley’s Q3 earnings report was also mixed. While revenue for the quarter declined 26% to $1.15 billion, net income was down 40% year-over-year. North American retail sales declined 10%, while global retail sales were down by roughly 13%. The company also lowered its full-year guidance.

Looking over a longer period, the performance of HOG stock with respect to the index over the last 3-year period has been quite volatile. Returns for the stock were 4% in 2021, 12% in 2022, and -10% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it 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 around rate cuts and multiple wars, 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 50% from here. Multiple factors could drive Harley’s stock higher. The Fed cut interest rates by 50 basis points last month, marking the first rate cut in close to four years.  With the current benchmark federal funds rate standing at 4.75% to 5% post the cut, there remains significant room for the central bank to lower borrowing costs further. The rate cut could help make vehicle financing more affordable, reducing monthly payments and encouraging potential Harley buyers who are on the fence to move forward with their purchases.

Moreover, Harley has also been seeing relatively strong demand for its model year 2024 vehicles including its Touring Motorcycles.  However, we estimate Harley Davidson valuation to be around $43 per share, about 35% above the market price, given Harley’s mixed track record of selling to the next generation of riders as its core millennial customer base ages. 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.
• September 2024: The Fed cut its benchmark rate by 0.5% and signaled more cuts coming this year.

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 the company holding $2.2 billion in cash and cash equivalents as of the most recent quarter. 

Conclusion

With the Fed’s monetary easing now underway, Harley’s stock has the potential for gains.

While investors have their fingers crossed for a soft landing by the U.S. economy, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 10/29/2024
[2] Cumulative total returns since the end of 2016

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