Why Harley-Davidson Stock Is Holding Up Despite A Tough Automotive Market

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HOG: Harley-Davidson logo
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Harley-Davidson

Harley-Davidson (NYSE:HOG) stock has risen by about 3% year-to-date considerably outperforming the S&P Automotive Index which remains down by about 22% over the same period. Like most automotive players, Harley, too, has been weighed down by a host of external factors including component shortages, rising inflation, and concerns about the global economy. However, there are a couple of factors that have helped the stock fare better than other big auto names.

Firstly, Harley’s recent financial performance has been better than expected. Over Q2 2022, revenue fell by just about 4% year-over-year to $1.47 billion, while net income actually grew by 5% to $216 million, despite the fact that the company suspended all vehicle production and dispatches for about two weeks during the month of May due to the semiconductor shortage. Moreover, while investors were expecting the company to cut its full-year guidance, the company actually reiterated guidance estimating motorcycle revenue growth of 5% to 10% for the full year, and an operating income margin of 11% to 12%. This has likely given investors some confidence about the company’s execution capabilities in the current environment, as it increasingly focuses on premium motorcycles and growing its margin accretive parts and accessories and apparel businesses.

Now there have been mounting concerns that the U.S. could enter a recession after GDP has declined over the last two quarters straight, with consumer spending also remaining weak. However, investors are betting that Harley’s business will hold up better than the broader automotive market even through a downturn. Demand for Harley’s bikes has been outstripping supply, with the company’s shipments over Q2 falling by about 15% over the last quarter due to supply chain issues. At the same time, demand for pre-owned Harley bikes has been strong, with prices on second-hand vehicles only slightly below new vehicles. This could be an indicator that the company will see relatively steady demand even in a tough macro environment.

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Harley’s valuation also appears quite compelling at current levels of about $39 per share, considering that it trades at just about 8.5x consensus 2022 earnings. Moreover, although the company saw flat to negative growth over the last several years, we expect Harley to grow revenue by around 6% in 2022 and by around 7% in 2023. Harley’s dividend yield of about 1.5%, although not generous, is well covered by the company’s financials and this could be making the stock a bit more attractive in the rising interest rate environment.

We value HOG stock at about $54 per share, about 40%  ahead of the current market price. See our analysis on Harley- Davidson Valuation: Expensive or Cheap for more details. Also, check out our analysis of Harley-Davidson Revenue for more information on the company’s key revenue streams and how they are trending.

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Returns Sep 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 HOG Return 0% 3% -34%
 S&P 500 Return -5% -21% 68%
 Trefis Multi-Strategy Portfolio -9% -23% 204%

[1] Month-to-date and year-to-date as of 9/23/2022
[2] Cumulative total returns since the end of 2016

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