Harley-Davidson Inc (HOG) recently announced a new bike, the Livewire, that will be added to its lineup in the future. The Livewire is battery-driven, and the motor sounds more like a very quiet jet engine than the traditional rumble of Harley-Davidson bikes. The announcement was a good public relations move for Harley-Davidson, and we are optimistic that consumers will be as eager for the electric Livewire bike as they have been for Tesla Motors Inc’s (TSLA) cars and other hybrids once it is finally released.
Innovation and excellent marketing has served HOG well over the last few years. The Harley-Davidson highs in 2014 were an eight-fold increase in value since the financial crisis dropped HOG stock to $8 per share in 2008. Everything seems to be coming up in HOG stock’s favor. However, the trend is past due for a pause. Much of our reasoning is based on the technicals, but there are fundamental concerns as well.
If we are right — and HOG falls in value — then there may be a second chance for longs to get in at close to October’s prices of $55 per share. Short-term speculators may even use the current lack of momentum to speculate to the downside. Unfortunately for Harley-Davidson, there isn’t much it can do about the fundamental issues it is facing in the short-term to try and prevent a drop in HOG stock’s price.
Like many U.S. manufacturers, Harley-Davidson’s growth has been primarily domestic with participation from western Europe. The domestic market still looks good, if a little flat, and low gas prices are probably in the Harley-Davidson’s favor. However, western Europe may be in for a very rough winter. Thanks to Greece (the “G” if the infamous European “PIIGs”), there is a real concern we will see another European debt crisis that scares consumers away from big purchases for a while.
In order to qualify for the 2010 and 2011 bailouts, the Greek government had to implement a series of very significant spending cuts to their social programs. These “austerity programs” have not sat well with the population, and the Greek government has been unable to maintain unity. The current ruling coalition announced on Monday that presidential elections would be moved from February 2015 to Dec. 17, 2014. The date change is a big gamble because if the parliament can’t elect a new president with a sufficient number of votes, then popular elections will have to be held. Leftist, anti-austerity parties could take control of the Greek government at that point, and the world’s bond market could start to reel again as another Greek default becomes more likely.
Uncertainty in Greek markets tends to spread across the eurozone like a virus. During the tension around the last two bailout deals, stocks like Harley-Davidson and Ford Motor Company (F) struggled to break resistance and unwound towards support. As you can see in the chart below, Harley-Davidson is in a similar situation in 2014. HOG stock has broken below a small broadening pattern at resistance. Based on the breakout, support from October seems to be a likely target.
Harley Davidson (HOG): Chart Courtesy of eSignal
It’s important to remember that consumer demand in the U.S. has been flattening out recently. While this isn’t a sign of recession, it means that growth has to be made up elsewhere. More than 15% of HOG stock’s sales are in Europe, which has already been in decline for two years now. If the decline in European sales accelerates, it is unlikely that North American markets will make up the difference.
On a short-term basis, we like the potential for a decline from this level. Although our ultimate target is near $54 per share, there is some support at $64 as well. If the Greek vote resolves itself smoothly, the more imminent support level should be prioritized over $54 per share for short exits and new long entries. Investors should have a much better idea for each possibility by the end of December when the parliamentary elections will have been completed.
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