Harley-Davidson's stock flies high after an analyst upgrades it to buy

By Ciara Linnane

Retail unit sales likely hit a low in April, before picking up in May and June, says analyst

Harley-Davidson Inc.'s stock rose 2.6% Friday, after D.A. Davidson upgraded the stock to buy from neutral and said it expects second-quarter retail unit sales are doing better than feared.

"Heading into HOG's (HOG) earnings release next week, we believe HOG is poised to exceed increasingly low expectations around retail, second-quarter earnings and their second-half outlook," analyst Brandon Rolle wrote in a note to clients.

The analyst raised his price target to $47 from $38, or about 25% above its current price.

Retail sales appear to be trending down by low to mid-single-digits, said Rolle, or an estimated 3% to 5% decrease from last year.

Feedback from dealers was more positive recently than in early May, and they reported that April was likely the worst month of the quarter, after which things started to pick up. Harley-Davidson has been hurt in recent quarters by higher interest rates in an inflationary environment that has made customers nervous about spending on discretionary items and led banks to implement stricter credit standards.

See also: Harley-Davidson's CFO Gina Goetter to move to Hasbro

"Our checks indicate HOG saw positive U.S. retail sales growth during June (against an easy year-over-year compare), which leaves us more positive on HOG's second-quarter U.S. retail sales upside," he wrote.

Dealers also made strong progress in reducing excess inventory and reported a good reception for new product launches, said Rolle.

"On average, dealers indicated MY22 inventory accounted for less than 10% of their new bike inventory exiting June," he wrote. "Multiple dealers indicated they were actually light on new bike inventory entering July, as HOG was more disciplined with their 2Q23 U.S. shipments and dealers were aggressively liquidating used inventory."

From March: Harley-Davidson's stock will be worth some 'upfront bumps,' analyst says

Rolle is expecting that will lead dealers to take on increased shipments in the second half, specifically in the Touring category, which accounted for most of the excess model-year 2022 inventory issue.

There was also greater-than-expected pre-order demand for the company's new CVO family product launch, which dealers report has exceeded Harley-Davidson's expectations.

And while there was initial bearish commentary about the new CVOs resembling an Indian model and concerns about the $42,000 to $52,000 price tag, dealers said the ability for customers to see the model in person and the introduction of its new 121 ci engine were huge selling points, he said.

In another positive, checks suggest that used prices at auction have been steadily climbing in the last three to four months, driven by greater demand.

"Entering July, the gap at retail between a new bike and a 20'-22' used bike was only about$1,000 to $2,000 (vs. about $3,000 to $5,000 earlier this year), which has vastly improved the attractiveness of a new bike entering the second half," said Rolle.

On another positive note, Harley-Davidson's debt profile shows its largest maturity is still a few years away. As the following chart from data-as-a service company BondCliQ Media Services shows, the company has a total of $3.8 billion of debt outstanding, $1.6 billion of which matures in 2025.

Harley-Davidson will report second-quarter earnings on July 27 before market open. The company is expected to post per-share earnings of $1.24, according to analysts polled by FactSet, down from $1.46 a year ago.

Sales are expected to come to $1.317 billion, up from $1.266 billion a year ago.

The stock has fallen 12% in the year to date, while the S&P 500 has gained 18%.

-Ciara Linnane

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07-21-23 1358ET

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