Milwaukee, Wis.-based Harley-Davidson, Inc. (HOG) is the largest motorcycle manufacturer in the United States, with more than 100 years of experience. It has a market cap of $5.40 billion. 

However, shares of HOG have slumped 20% in price over the past six months, given bearish investor sentiment surrounding the automobile industry. In comparison, First Trust NASDAQ Global Auto Index ETF (CARZ) has declined 1.9% over this period.

So, here is what we think could shape HOG’s performance in the near term:

EV Business Spin-Off

On December 1, HOG announced plans to spin off its electric vehicle (EV) business segment LiveWire through a SPAC deal. LiveWire is set to merge with blank check company AEA-Bridges Impact Corp. to become the first publicly traded motorcycle company in the United States. The deal is expected to close in the first half of 2022, valuing the combined entity at $1.77 billion. HOG is expected to have a 74% equity interest in the newly formed company.

Regarding this, HOG Chairman and CEO Jochen Zeitz said, “By building on Harley-Davidson’s 118-year lineage, LiveWire’s mission is to be the most desirable electric motorcycle brand in the world, leading the electrification of the sport. This transaction will give LiveWire the freedom to fund new product development and accelerate its go-to-market model. LiveWire will be able to operate as an agile and innovative public company while benefitting from the at-scale manufacturing and distribution capabilities of its strategic partners.”

This spin-off effectively reduces HOG’s stake in the electric motorcycle company, thereby reducing its share in profits. As a result, HOG shareholders might witness a decline in EPS and ROE. In addition, the ongoing semiconductor shortage, which is expected to last well into 2022, might limit LiveWire’s growth prospects in the near term.

Mixed Valuation

In terms of forward non-GAAP P/E, HOG is currently trading at 8.87x, which is 36% lower than the 13.87x industry average. Its 0.19 forward non-GAAP PEG multiple is 78.6% lower than the 0.89 industry average.

However, the stock is trading 1.23 times its forward sales, which is 9.7% higher than the 1.12 industry average. Furthermore, its 12.02 forward EV/EBITDA ratio is 18.7% higher than the 10.13 industry average. Also, its 33.36 forward Price/Cash Flow multiple is 176.8% higher than the 12.05 industry average.

Consensus Rating and Price Target Indicate Potential Upside

Of the five Wall Street analysts who rated HOG, three rated it Buy while one rated it Hold and sell. The 12-month median price target of $51.00 indicates a 45.4% potential upside from yesterday’s closing price of $35.08. The price targets range from a low of $39.00 to a high of $70.00.

POWR Ratings reflect Uncertainty

HOG has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

HOG has a C grade for Growth and Momentum and a D for Stability. HOG’s levered free cash flow has increased at a 12% CAGR over the past three years. But its revenues have declined at a  4.5% rate per annum over the past three years, in sync with its  Growth grade. Moreover, the stock is currently trading below its 50-day and 200-day moving averages of $37.51 and $41.10, respectively, indicating a downtrend. This justifies the Momentum grade. In addition, HOG’s relatively high 1.47 beta accounts for the Stability grade.

Of the 67 stocks in the F-rated Auto & Vehicle Manufacturers industry, HOG is ranked #12.

In addition to the grades I have highlighted, view HOG ratings for Value, Sentiment, and Quality here.

Bottom Line

HOG’s sales and profit margins are expected to be adversely affected by the surging inflation levels and supply chain disruptions. Furthermore, the resurgence of COVID-19 cases due to the rapid spread of the omicron variant has resulted in renewed social distancing restrictions and lockdowns in several countries. This might cause HOG’s sales to decline in the coming months. Analysts expect the company’s EPS to fall 21.4% year-over-year in its fiscal first quarter of 2022. Thus, investors should wait until the macroeconomic headwinds subside before investing in the stock.

How Does Harley-Davidson, Inc. (HOG) Stack Up Against its Peers?

While HOG has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, Daimler AG (DDAIF), Isuzu Motors Limited (ISUZY), and Suzuki Motor Corporation (SZKMY), which have B (Buy) ratings.

HOG shares were trading at $35.34 per share on Tuesday morning, up $0.26 (+0.74%). Year-to-date, HOG has declined -2.21%, versus a 23.65% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

More...