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Can Harley-Davidson Overcome Supply-Chain Disruptions?
Stock Analysis & Ideas

Can Harley-Davidson Overcome Supply-Chain Disruptions?

Motorcycle manufacturer Harley-Davidson (HOG) is focusing on models and technologies that align better with market trends, as part of its long-term growth plans.

Importantly, its business turnaround program called “Rewire” was successfully completed in January this year, resulting in improved agility and efficiency, among other things.

The Rewire laid a strong foundation for the “Hardwire,” Harley-Davidson’s five-year strategic plan to enhance long-term growth, profitability, and shareholder value, which was revealed in February.

Moreover, Harley-Davidson’s electric bike is gaining popularity, which is a positive for the company’s prospects. (See Harley-Davidson stock charts on TipRanks)

However, persistent supply-chain disruptions stemming from global microchip shortages are inflating commodity prices, which in turn is denting the company’s margins.

During its Q2 Fiscal Year 2021 results, Harley-Davidson cut its expectation for full-year GAAP operating income margin for the Motorcycle segment from 7%-9%, to 6%-8%, given the supply shortages and the exorbitant tariff of 31% imposed by the European Union. This makes the company’s stock warrant a cautious stance. Therefore, I maintain a neutral stance on the stock.

A highly leveraged balance sheet is also an area of concern. In the second quarter, Harley-Davidson saw cash and cash equivalents of only $1.74 billion, against long-term debt of $4.75 billion. This stretch might restrict the company’s ability to efficiently pursue growth opportunities.

Another concerning trend that has been observed in the company’s financials is the declining return on capital employed (ROCE), indicating a shrinkage of net assets as well as profits (before taxes). This suggests that the company might be showing signs of aging, which is making investors cautious.

Wall Street consensus reflects cautious sentiments around Harley-Davidson, with a Hold rating based on three Buys, three Holds, and two Sells. The average Harley-Davidson price target of $46.67 indicates an upside potential of 21.2%.

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Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.

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