Shares of Harley-Davidson Inc (NYSE:HOG) are up about 9% from where they opened on the first day of trading in 2018. While the performance is impressive, it makes me wonder whether HOG stock can maintain its recent ride of momentum.
On the plus side, shares did push through an important level on the charts. However, concerns linger regarding its current business.
What’s the story?
Harley-Davidson stock will be active following the company’s Jan. 30 earnings report before the open. Analysts are looking for earnings of 46 cents per share on revenue of $1.01 billion. This would represent 70% and 8.6% growth, respectively. Obviously earnings outpacing sales growth is a bullish nod towards HOG’s expanding margins.
Although expectations are calling for big fourth-quarter growth, 2017 won’t end on such a positive note. Should HOG report in-line results, earnings will fall ~11% and sales will decline 7.5% for the year. While Harley’s set to improve in 2018, it’s only in so-so fashion.
Forecasts call for earnings per share of $3.91 in 2018. While that represents 14% growth from 2017 to 2018, it only reflects 1.5% growth from 2016’s results of $3.83. Further, sales are forecast to grow just 1.5% for the year. Analysts’ 2018 sales estimate of $4.97 billion does not eclipse the $5.27 billion in 2016 sales.
Of course it’s good to see the motorcycle maker return to growth; there’s no arguing that. However, when compared to 2016’s results, it’s clear HOG isn’t making as impressive of a road trip as it seems on the surface.
Digging Deeper, Driving Further
Let’s take a closer look at HOG stock. Despite the mediocre growth profile, let’s consider a few things. For starters, this quarter is set to be quite strong. And while the growth for 2018 isn’t impressive against 2016’s numbers, it is more impressive against 2017’s results. In particular, double-digit earnings growth is something to cheer.
Further, consider the U.S. consumer. Harley is as American as it gets. And let’s face it, when the U.S. consumer is feeling confident and the economy is doing well, consumers like to treat themselves. Be it in video games with Activision Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts Inc. (NASDAQ:EA), a new car from Ford Motor Company (NYSE:F) or General Motors Company (NYSE:GM) or a new recreational vehicle from Polaris Industries Inc. (NYSE:PII), they like to have fun.
To think Harley-Davidson stock won’t be a direct beneficiary of that is foolish.
The fourth quarter is set to carry plenty of momentum. Riding fast alongside an impressive economic backdrop, the new tax system should allow for an even better year at Harley. If the company can beat the numbers and management tells a good story with solid guidance, HOG stock could rally.
That said, it is up 10% already this year. So maybe it does need to cool down — even with a good quarter.
While we don’t know how HOG stock will react to earnings, at least we know it’s not expensive. Shares trade at just 14 times forward earnings. At the same time, Harley-Davidson stock pays a dividend yield of about 2.6%. Further, the company’s cash flow from operations and free-cash flow has been strong.
Trading HOG Stock
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Of course, earnings puts investors in a rather precarious situation. In theory, one could buy here and use a close below this key support level as their stop-loss. In reality, a negatively received earnings results could easily send HOG stock gapping far below this level. Since it will report before the stock market opens, we’ll have no way of managing this risk (unless the trader is fluent with options trading and risk mitigation).
I like HOG stock enough where I wouldn’t sell the position if I were a longer term investor. The secular story is attractive, the valuation is low, the yield is solid and the worst seems to be behind it.
I really like Harley-Davidson stock if it stays between $54 and $56 after earnings. If so, it puts the previous $62 highs back in the cards, a return of almost 15%.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
