For most of the past two years, among the conversations I think we’ve all become accustomed to are the kinds of activities we’d like to take up again “after the pandemic is over.” We’ve been deprived from enjoying a variety of “normal” activities to one extent or another; from large social gatherings to delaying extended vacations, or even just putting off a night of dinner and a movie, I’m willing to bet that at some point, you’ve told yourself, “I can’t wait until I can do that again.” I also think that extreme circumstances like a global pandemic also prompt some introspection that extends to thinking about things we might have liked to do “someday,” but never really seemed to get around to doing. When life becomes more precious, you start thinking about how you’ve lived that life, which generally includes thinking about taking in the amazing world around us.
Before I start sounding too existential, let’s pull this back to thinking about economics, investments, and the markets. We’re certainly aware of the limitations COVID-19 have placed on just about every kind of typical, social activity we might enjoy, including the items that may fit into the “someday I’ll do this” picture. Travel is certainly an area that not only was severely impacted in 2020 at the early stages of the crisis, but that continues to be hampered by a virus that continues to stress healthcare systems around the world. The fact is that at some point, whether it is sooner or later, most of us are going to look for opportunities to take up activities and plans we’ve been putting off because of the health crisis.
Travel takes in a number of activities, from air flight to destination vacations, to day trips out of town to weekend getaways within a reasonable driving distance. For many, day trips and weekend getaways might also include hopping on a motorbike to enjoy the feeling of riding down a highway on a sunny day. This is certainly an example of the kind of activity that has been impacted by pandemic-induced shutdowns and restrictions, but that also could logically been seen as a potential “it’s time to do this” kind of opportunity that I think many of us would like to seize onto in the near future.
Harley-Davidson Inc. (HOG) is a recognizable name in the United States, even iconic for a certain segment of the population that I think includes daytrippers and weekend vacationers. it is also a stock that followed a strong downward trend for most of the past year, falling from a peak at around $52 in May of 2021 to a trend low point in late January at around $32. From that point, the stock rallied to start this month and is now sitting at around $35.
HOG is a company with an interesting fundamental profile; there are a number of elements that indicate strength, including a stable dividend management was able to maintain throughout the pandemic, good liquidity and strong Free Cash Flow. Despite those strengths, many analysts point to aging demographics among HOG’s traditional customer base (boomers and Generation Xers) that they predict will moderate sales over the next year or so. The company itself has acknowledged a shift over the last couple of years in consumer trends away from motorcycles (including the kind of heavy bikes the company is known for), most particularly in the United States.
That bearish narrative doesn’t really line up with the company’s earnings and revenues pattern over the last year, however, or with other signs that the company not only has weathered the pandemic so far in very good shape, but also that their healthy Free Cash Flow, increasing Net Income and manageable debt give the company a lot of flexibility to continue focusing on a 5-year strategic plan to build consistent revenue and earnings growth. Are the stock’s fundamentals, along with its current, extreme discount from historical highs enough to make the stock a compelling value-based opportunity? Let’s find out.
Fundamental and Value Profile
Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). The Company operates in two segments: the Motorcycles & Related Products (Motorcycles) and the Financial Services. The Motorcycles segment consists of HDMC, which designs, manufactures and sells at wholesale on-road Harley-Davidson motorcycles, as well as motorcycle parts, accessories, general merchandise and related services. The Company manufactures and sells at wholesale cruiser and touring motorcycles. The Financial Services segment consists of HDFS, which provides wholesale and retail financing and insurance-related programs to the Harley-Davidson dealers and their retail customers. HDFS is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans for the purchase of Harley-Davidson motorcycles. HOG has a current market cap of $5.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased about 12.4%, while sales rose a little over 17%. Over the last quarter, the earnings declined by -16.3%, with sales rising a little over 2.5%. HOG;s operating profile shows improvement, with Net Income that grew from 10.55% over the last twelve months to almost 12% in the last quarter.
Free Cash Flow: HOG’s Free Cash Flow is generally healthy, at more than $868 million. That does mark a decrease from about $1.2 billion three quarters ago and $1.1 billion in the last quarter. The deterioration in Free Cash Flow is a red flag to pay attention to, but it should also be noted that even with the decline, the current number still translates to a healthy Free Cash Flow Yield of 15.85%.
Debt to Equity: HOG is among the most highly leveraged companies in its industry; it has a debt/equity ratio of 2.09. That measurement is a bit misleading in HOG’s case, however because they retain both healthy liquidity and more than adequate financial ability to service their debt with operating profits. In the last quarter, total cash and liquid assets were almost $2.2 billion, while long-term debt is about $4.87 billion.
Dividend: HOG pays an annual dividend of $.60 per share. At the stock’s current price, that translates to a dividend yield of 1.69%. It is worth noting that pre-pandemic, HOG’s dividend was around $1.48 per share; but in an industry where many of the most recognizable and established companies were eliminating their dividend altogether, and still have yet to reinstate them, the company’s ability to maintain their dividend payout is also noteworthy.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $54 per share. That suggests that the stock is significantly undervalued at its current price, with 51% upside from its current price. It is also worth mentioning that after the first quarter of 2021, this same analysis yielded a fair value target at around $48 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s price activity over the past year. It has followed a strong downward trend since May 2021, dropping from its 52-week high at around $52 to its low point at around $32 in late January. The stock has rallied from that point, but found immediate resistance at around $37, with current support sitting at around $35 based on the stock’s current price activity as well as pivots seen in December, October and March of last year. A drop below $35 could see downside to the stock’s yearly low at around 432 before finding next support, while a pus above $37 should find next resistance at around the $40 mark, roughly inline with the 38.2% retracement line and consistent with the stock’s peak in early January.
Near-term Keys: HOG is an interesting company, in an economically sensitive industry that I think could represent an increasing risk in the current economic environment; remember that the Fed is set to raise rates at least three times in 2022, with the first increase expected next month. That is generally expected to mute demand for stocks like HOG, however it is also possible that as the year progresses, positive progress on the pandemic front could provide a tailwind and as people look for ways to embrace “old normal” activities. The fact is that the stock is deeply discounted, with a long-term, practical price target that makes it a tempting value-based opportunity. If you prefer to focus on short-term trading strategies, you could also use a push above $37 as a signal to buy the stock or work with call options, with $40 offering an attractive bullish profit target. A drop below $35 could be a signal to consider shorting the stock or buying put options, with the stock’s 52-week low at around $32 providing a practical profit target on a bearish trade.