Iconic motorcycle brand Harley-Davidson (HOG) blasted up nearly 10% in premarket trading on Monday. It also managed to hold onto some of those gains going into the day’s trading session.
So, what made Harley suddenly so attractive to investors? As it turns out, all it took was a new trade deal that gave Harley a leg up on its supply chain operations.
While this was a stroke of good luck for Harley, the rest of Harley’s overall picture leaves me bearish on the stock going forward. (See Analysts’ Top Stocks on TipRanks)
Year-to-date, Harley stock has been marked by a few notable moves. Back in January, Harley had managed to climb to the $40 per share mark, where it stayed there for a couple weeks, even pushing above $40 at some points.
Then, a plunge in February threatened to break through the $30 floor that the stock hadn’t seen in months. Harley recovered from these doldrums and began a fight that saw the company’s stock surge to its shining moment in mid-May, where the company cleared $50 a share.
It didn’t last, and the company began a several-month slide to where we are today. (See Harley-Davidson stock charts on TipRanks)
Meanwhile, the move that gave Harley a surge on Monday came from a recently-established deal between the U.S. and the EU. Under the terms, the EU dropped a set of steel and aluminum tariffs.
Had those tariffs remained in place, Harley would have had to pay a tariff of 25% on European steel, as well as another 10% for European aluminum. The tariffs date back to 2018 during the Trump Administration. With this move, the total tariff rate will drop from 31% to just 6%, effective January 1, 2022.
A Lot to Like, but Plenty of Concerns
To be sure, there’s a lot to like about Harley as a whole. It’s still one of the greatest brand names on Earth. It’s making some exciting strides as part of the growing electric vehicle market. The COP26 climate summit features security riding Harley’s own electric motorcycle, the Livewire.
Harley’s most recent earnings report certainly didn’t hurt things either. The company posted $889 million in revenue for the last quarter just on motorcycles, which represented an increase of 29%.
The company also beat analyst expectations pretty handily, turning in earnings of $1.18 per share against an expected $0.77. Expectations for total revenue were also shattered. The company posted $1.36 billion against projections of $1.14 billion.
The biggest reason for Harley’s success in the last quarter seems to stem from its “Hardwire” plan. This calls for the company to reduce its total offerings and instead focus on only the most profitable bikes in each particular market.
The ongoing supply chain issues don’t seem to be hitting very hard either, as Harley has been actively reducing shipments to focus on the products they know have the best chance of selling.
The problem, though, is that Harley spent a long time trending downward because its high-end bikes simply weren’t selling. We’ve seen improvement on this front, of course. However, it’s easy to wonder how much of that change isn’t related to Harley itself.
All the stimulus money pumped into the economy may have helped here too. It’s entirely possible that the upswing in Harley sales was the result of pandemic conditions.
Not just the stimulus, either; how many Harley buyers used the cash they would have used on vacations, had vacations been possible instead? What we’re seeing here may ultimately be a flash in the pan.
Wall Street’s Take
Turning to Wall Street, Harley-Davidson has a Moderate Buy consensus rating, based on four Buys, one Hold, and one Sell assigned in the past three months. The average Harley price target of $50 implies 28% upside potential.
Analyst price targets range from a low of $38.00 per share to a high of $62.00 per share.
Concluding Views
There is a lot to like about Harley-Davidson. However, it’s hard to forget the conditions that got us to where Harley is right now. The Hardwire plan does seem to be working, but not for the reasons we think it is.
Right now, there’s too much uncertainty around Harley’s future to make it a good recommendation.
We need to know if the recent improvements are here to stay, or just the result of temporary conditions. Once we know that, we can better decide whether or not to invest. For now, though, I’m bearish on Harley-Davidson.
Disclosure: At the time of publication, Steve Anderson did not have a position in any of the securities mentioned in this article.
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