During the current COVID-19 environment, technology stocks seem to get all of the glory. However, I believe that by looking beyond the headlines, one can find value in stocks that are positioned to benefit from the current environment. One such stock that I see is Harley-Davidson (HOG), which is a well-recognized, classic American company. In this article, I evaluate what makes this an attractive investment at the current valuation; so let’s get started.
Looking Into Harley-Davidson
There are perhaps few companies that spell Americana more than Harley-Davidson. Its iconic brand is synonymous with motorcycles and is loved by enthusiasts in the U.S. and around the world. Its loyal customer base like the fact that the bikes are highly customizable, therefore making each bike their own personal expression.
What I like about the company is that its brand transcends beyond just the product, and into a feeling. Emotions play a huge role behind consumers’ large discretionary purchases, and this is exemplified by the following quote from the company:’
The current environment, however, has not been kind to Harley. Revenue was down by 47% YoY in the latest quarter due to lower shipments, and the company posted a net loss of -$1.83 per share. This was due to a combination of restructuring charges and the fact that nearly 60% of its global dealer network was closed back in April. In addition, Harley had lingering issues with a bloated cost structure and an inefficient supply chain. These factors led to the company cutting its quarterly dividend to just $0.02 per share.
These challenges have resulted in the shares widely underperforming both the market and that of its competitor Polaris (PII), which makes off-road vehicles, snowmobiles, and the Indian brand motorcycles. As seen below, HOG has returned -39% on a YTD basis, while PII posted just an -11% return.
What I find encouraging, however, is that the board of directors seems to have acknowledged Harley’s missteps with the appointment of the new CEO, Jochen Zeitz, in early May of this year. Jochen came from Puma (OTCPK:PMMAF), where he was credited with that company’s turnaround, and the hope is that he will do the same for Harley. Initial reviews seem to be positive.
The activist investor, Impala Asset Management, which holds a 2.5% stake in Harley, noted in its August report that “for the first time in five to six years, the company is on the right track again,” and that “this is a fundamentally strong company that just lost its way.”
Looking forward, I see the company as delivering on its ‘Rewire’ restructuring efforts. This year, management expects to deliver $250M in cash savings, excluding restructuring charges. In addition, the company has simplified its organizational structure, by merging complementary divisions together. I see this as enabling the company to operate and make decisions more efficiently by reducing bureaucracy.
In addition, the company is refining its product models, which reduces complexity and enables investment into high growth areas, as management noted during the last conference call:
“Our product portfolio and launches have been reset for maximum impact with a fully aligned go-to-market process. We’re streamlining our motorcycle models by approximately 30%, with plans to further refine our product portfolio. This enables us to invest in the products and platforms that matter the most, while better balancing our investment in new high potential segments.”
In the meantime, Harley has a strong $4.23B in liquidity, which is comprised of $3.4B in cash, and $817M in availability on its line of credit. Although the company raised debt during the last quarter, management noted that it is within its financial debt covenants, and the company maintains a BBB investment grade rating from S&P.
The company appears to be making continued progress in its streamlining efforts, as it announced its exit from manufacturing in India while it is reportedly close to a distribution deal with India’s Hero MotoCorp. I see this as a plus, as it reduces Harley’s manufacturing overhead, which can be especially burdensome during the economic recession.
Looking forward, I’m encouraged by the fact that more than 90% of its global dealer network was open at the end of June. I see Harley as benefiting from an increased need for outdoor recreation due to social distancing measures.
Turning to estimates, it appears that analysts are expecting a strong rebound in the EPS in the next two years, with a consensus Buy rating (score of 3.8 out of 5) and an average price target of $31.92.
Based on the 2021 earnings estimate, the forward P/E of the stock is 9.24, which is well below the stock’s normal P/E of 15.8. While the stock may not deserve to trade at its normal P/E based on a forward estimate, I do see upside potential to at least bridge some of the gaps.
Harley-Davidson has the power of a strong brand name that resonates well with consumers. While it’s had its fair share of recent challenges, I’m encouraged by the company’s turnaround efforts being led by its new CEO. So far, it appears that the company is making good progress, and revenue should pick back up as the vast majority of its dealer network has re-opened for business. In addition, I see the increased need for outdoor recreational activities as being a strong tailwind for the company. Based on forward P/E estimates, the stock appears to be undervalued. For this, and the reasons stated above, I have a favorable view of the shares and see upside potential.