Will Harley-Davidson Ride Again?

05/20/2020 5:00 am EST

Focus: TRANSPORTATION

David Coleman

Quantitative Portfolio Strategist, Argus Research

We are upgrading Harley-Davidson (HOG) to reflect our positive view of the company’s new strategic plan designed to enhance the firm's core strengths, notes David Coleman, an analyst with Argus Research, a leading independent Wall Street research outfit.

The company is facing significant risk from the COVID-19 pandemic as it has stopped production and closed its retail stores. It is also working to mitigate the impact of the pandemic through salary cuts, hiring freezes, and adjustments in its new product launch schedule. It has also suspended share buybacks and cut its dividend.

On February 28, Matthew Levatich stepped down as CEO. The departure was widely expected given the company’s weak results. Board member Jochen Zeitz is serving as acting president and CEO. He was the chairman and CEO of the sporting goods company PUMA from 1993 to 2011.

Knowing that it cannot rely solely on its traditional clientele, predominantly white male baby boomers, Harley has been working hard to appeal to women, minorities, and younger Gen X and Millennial consumers, as demonstrated by its plan to launch 100 new “high-impact” models over the next 10 years.

HOG shares are trading toward the low end of their 52-week range of $14.31-$41.89. They are trading at 17.4-times our 2020 EPS estimate and at just 6-times our 2021 estimate.

The price/sales ratio is 0.6, below the five-year average and the peer average. The price/book ratio of 1.8 is below the five-year historical average of 3.9 but in line with the peer average of 1.8.

On valuation, HOG shares have fallen more than 40% over the last quarter and are trading near the low end of their 52-week range and at just 6-times our 2021 estimate. We believe that the pullback provides risk-tolerant investors with a favorable entry point, and are setting a target price of $30.

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