[Editor’s note: This article was previously published July 2018. It has since been updated with current information about HOG stock and republished.]
Investors shouldn’t care about the fact that President Donald Trump previously tweeted negatively about motorcycle-maker Harley Davidson (NYSE:HOG) last week. But they should care about why HOG stock ended up in his crosshairs.
Shares of HOG stock have fallen over 9% over the last five trading days. In July, Harley Davidson said it is shifting some production of its motorcycles for European customers from Kansas City to Thailand to avoid retaliatory tariffs from the European Union, prompting a volatile trading range for HOG stock holders. But today, Harley Davidson reported third-quarter earnings that were better-than-expected.
Per-share earnings came in at 78 cents, handily beating the 53 cents Wall Street expected. However, steep declines in Harley’s domestic sales doesn’t sit well with investors, especially in a seller’s market.
What’s more, HOG stock is caught in the middle of Donald Trump’s trade war. Tariffs on motorcycles brought in to the EU have jumped from 6% to 31%, the company said, in response to steep steel and aluminum tariffs that Trump implemented. And Europe is Harley Davidson’s second largest market, according to its earnings reports.
A Harley-Davidson should never be built in another country-never! Their employees and customers are already very angry at them. If they move, watch, it will be the beginning of the end – they surrendered, they quit! The Aura will be gone and they will be taxed like never before!
— Donald J. Trump (@realDonaldTrump) June 26, 2018
A tweet from Trump is whatever. But the tariffs themselves are tangible — and Harley Davidson, which has lost a quarter of its value over the last year, doesn’t have any growth to spare.
HOG Stock Was Already in Trouble
Last year, the number of motorcycles Harley Davidson shipped dropped 8%, with its revenue following suit. This year, HOG is slated to grow sales by less than 1%. Next year, it’s slated to grow sales by just over 1%.
Moving production overseas is going to tack on costs for a company working hard to optimize production, and a lack of organic growth means a lack of wiggle room.
On top of that, S&P Global Ratings warned that it might downgrade the company’s debt as a result of the tariffs, which Harley Davidson said will cost its profits $100 million this year.
Harley Davidson management is doing what it can to prod its stock along, continuing its dividend and authorizing the repurchase of another 15 million shares of HOG stock. While that’s promising, to me it’s also proof that Harley Davidson doesn’t have a choice. With organic growth lacking and a trade war intensifying, the company has to entice investors somehow.
The Bottom Line for HOG Stock
Unfortunately, Harley Davidson’s headwinds are extremely fundamental — they relate to the cost of production and could thus weigh on the bottom line quite directly. Plus, having your business connected to Trump is a concern, at least from a psychological perspective.
The current political uncertainty has made the market extremely volatile this year broadly speaking and is sure to have the same effect on HOG stock specifically going forward, particularly after this week.
Short-term volatility plus fundamental headwinds are a bad combination. Don’t expect HOG stock to start revving higher anytime soon.
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.