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Holly LaFon
Holly LaFon
Articles (8704)  | Author's Website |

Harley-Davidson: Embattled Stock Gurus Are Selling

First-quarter troubles sparked a selloff, but lower valuation may lure some in in the second quarter

July 11, 2018 | About:

A number of prominent shareholders fled Harley-Davidson (NYSE:HOG) in the first quarter after the iconic motorcycle maker’s January earnings report showed weak sales and it announced it would close a Kansas City manufacturing plant.

According to GuruFocus data, few investors tracked saw the stock as a buy as the share price plunged in January, ending the first quarter down 19%. Five sold completely out of their stakes in the first three months: Joel Greenblatt (Trades, Portfolio), John Hussman (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and NWQ Managers (Trades, Portfolio).

Those reducing their positions were Mario Gabelli (Trades, Portfolio) and Dodge & Cox. Bill Nygren (Trades, Portfolio), portfolio manager of Oakmark, slashed his position by 99.5%. Only two investing houses, Hotchkis & Wiley and Pioneer Investments (Trades, Portfolio), added to their stakes, while David Dreman (Trades, Portfolio) stayed put.

The company said on Jan. 30 that its net income fell 82% for the fourth fiscal quarter to $8.3 million. Earnings per share were down to 5 cents from 27 cents a year earlier, due primarily to President Trump’s tax cut and a product recall. Revenue increased to $1.23 million from $1.11 million.

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More concerning for investors was a 6.7% decline in sales for 2017 versus 2016 that included a drop of 8.5% for U.S. and 3.9% for international sales.

“Our Harley-Davidson thesis required continued strong growth internationally and improved U.S. sales as the number of used bikes, which date back to peak year deliveries more than 10 years ago, become less attractive substitutes for new bike sales,” Bill Nygren (Trades, Portfolio) said in an investor letter. “The company’s international and U.S. sales have lagged behind our expectations, and after reassessing Harley-Davidson’s per share value, we found a better alternative for the portfolio, American Airlines (NASDAQ:AAL).”

Harley-Davidson will be a stock to watch as investors release portfolio updates for the second quarter ahead of the Sept. 15 deadline. Its price has fallen 1% this week and 17% year to date, making it attractive from a valuation standpoint. Harley-Davidson bears a price-earnings ratio near a one-year low at 14.67, a price-book ratio near a five-year low at 3.67 and price-sales ratio near a five-year low at 1.32.

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More troubles haunt the company, however. On June 22, the EU responded to President Trump’s U.S.-imposed steel and aluminum tariffs by increasing its tariffs on Harley-Davidson motorcycles exported from the U.S. to 31% from 6%. The hike will add $2,200 to the price tag of every Harley shipped from the U.S. to the EU, the company said, prompting it to move some operations to international facilities.

“Harley-Davidson believes the tremendous cost increase, if passed onto its dealers and retail customers, would have an immediate and lasting detrimental impact to its business in the region, reducing customer access to Harley-Davidson products and negatively impacting the sustainability of its dealers’ businesses,” Harley-Davidson said in a letter on June 25, as the stock fell 0.6% for the day.

For the remainder of 2018, the burden will tack $30 million to $40 million in costs onto the company, a significant hit to its bottom line, which totaled $522 million in profits last year. Harley-Davidson drew some 16% of its revenue from Europe and the Middle East in 2017, making it the company’s second-largest geographic segment.

Harley-Davidson pegged its annual costs at $90 million to $100 million as it takes from nine to 18 months to fully shift European production overseas.

President Trump addressed the company's decision from his Twitter account.

“Surprised that Harley-Davidson, of all companies, would be the first to wave the White Flag. I fought hard for them and ultimately they will not pay tariffs selling into the E.U., which has hurt us badly on trade, down $151 Billion. Taxes just a Harley excuse - be patient! #MAGA,” he tweeted on June 25.

The tweeting extended for two consecutive days, while Harley-Davidson’s stock rose during both trading sessions to end the week up 1.23%.

Harley has gained 5.1% since since its tariffs announcement to close at $42.95 Wednesday. 

Uncertainty hangs over the stock as investors await a July 24 earnings call in which it will provide further details of its plans and the financial effects of the tariffs.

About the author:

Holly LaFon
I'm a financial journalist with a master of science in journalism from Medill at Northwestern University.

Visit Holly LaFon's Website


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