(HOG) (Harley Davidson)

Overview of the Company - Harley Davidson manufacturers and sells Harley Davidson motorcycles. A portion of their business is providing financing and insurance protections. Harley Davidson is also known for their merchandise. If you see a motorcycle on the road, there's a good chance it's a Harley, especially in America where HOG owns around 30% of the market share.

Fundamental Analysis - Harley Davidson is an American icon and there is no doubt that they have built a loyal community that will never buy any motor vehicle unless it's a Harley. However, can Halrey Davidson continue to grow earnings and be competitive with foreign brands for the masses. We know that they have a consumer base, but there is no growth there. Harley will need to to show revenue and earnings growth.

How (HOG) Stacks Up to Competitors - I will be comparing Harley Davidson (HOG) to another major competitor which owns about 20 percent market share compared to Harley’s 30%. Honda (HMC). Also in the mix is Polaris (PII) which makes recreational vehicles like motorcycles, snowmobiles and boats. HOG owns the top spot for profitability but falls second in management effectiveness or their return on assets. Harley has very good earnings growth this year and it is worth noting that Polaris actually at -30% earning growth (yoy). Hog trades at around twice book value, cheaper than PII. Also notable is the short percentage for shares outstanding. HOG at 11% and PII at 7.5%. HMC’s short percentage is at .1% - even though the stock is down from levels achieved in ‘06. However, HOG has been halved in that same timeframe, so this isn't a good group at all.

Bull Case - After the best quarter in a couple years for their earnings in Q1 2021, HOG has been killing it on earnings. Most recently, it beat on their Q3 earnings - from an estimated $0.85 to $1.18 actual EPS. With recent beats on earnings it is clear that Harley’s are still the go-to motorcycle, and there is still demand out there. With rising gas prices, we may see more and more people turn to America's motorcycle brand to stay away from the gas pump as much as possible.

Bear Case - The rise of the EV market will still hurt HOG. Additionally, SUVs are becoming more and more popular among the young generation - which is HOG’s future customers. Rising wages and input costs are going to hurt Harley Davidson's bottom line, and they already have enough issues dealing with overseas competitors. A dwindling customer base and higher input prices will hurt Harley in the years to come. It's a question of when not why. Harley Davidson may get one final hurrah in the next couple years but as safety and practicality becomes more and more of an issue, Harley Davidson is on a path to zero.

Valuation and My Price Target - EPS has proved to be strong for Harley and I think given the recent beats HOG will provide solid EPS for the next year. However, it could be a lot better. Higher input costs are going to really hurt the bottom line, for that reason I'm going to estimate EPS to be around $4.10 for the next year. I think they trade at a fairly expensive multiple of 10x but we’ll use that since I do think that regardless of higher prices, the consumer will be willing to pay up in the short term. This will justify their growth and therefore, their multiple. This gives me a one year price target of $41.00 - almost 14% upside from here, not including the >1.5% dividend yield.

The Verdict - BUY HOLD SELL

Over the long term I think this is a business that will be consolidated year after year. I think HOG will be trading below this level after ten years and will almost certainly underperform the market. However, I think in the short term HOG will benefit from the strong demand for automotives and consumers turning to a more efficient mode of transportation before they fully switch to electric. This may last only a couple years, but I think over the rest of 2021 and into October of 2022, HOG will give you a return of around 14%. This isn't enough to warrant a buy, but I don't think Harley Davidson is a sell yet. Therefore, HOG is currently a HOLD.

*all data provided by yahoo finance and nasdaq.com and

https://www.thomasnet.com/articles/top-suppliers/american-motorcycle-manufacturers-and-suppliers/