Don’t Buy Harley-Davidson Inc (HOG) Stock on This Dip

Luke Lango

Updated Tue, Jul 18, 2017, 10:49 AM

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Harley-Davidson Inc (NYSE:HOG) stock is down big today after reporting second-quarter revenues that missed the mark. The results were so bad, management was forced to substantially cut its full-year 2017 shipment guide. That sent investors into panic mode. HOG stock is down about 10% as of this writing.

Don't Buy Harley-Davidson Inc (HOG) Stock on This Dip

Source: Crysis Rubel via Flickr (Modified)

The global retail environment for motorcycles remains challenged by secular trends, and HOG stock is really feeling this pain. Year-to-date, HOG stock is down almost 20% while the S&P 500 is up close to 10%.

Does this underperformance make HOG stock an attractive “buy the dip” candidate?

Let’s see.

Tough Quarter Underscores Adverse Secular Trends for HOG

Harley-Davidson has had a few bad quarters in a row now, and its just getting worse. Two quarters ago, worldwide retail motorcycle sales fell 0.5% while U.S. retail motorcycle sales actually rose 0.1%. That isn’t great, but its not bad. Investors were hopeful that there were some signs of motorcycle demand stabilization.

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Unfortunately, that wasn’t the case. In fact, things have gotten much worse over the past two quarters for HOG. Last quarter, worldwide motorcycle sales fell 4.2%, led by a 5.7% decline in the U.S. This most recent quarter was even uglier. Worldwide motorcycle sales fell 6.7%. U.S. sales dropped a whopping 9.3%.

The rapid deceleration in motorcycle sales globally forced HOG management to lower their full-year shipment guidance. Whereas HOG management previously called for full-year shipments in 2017 to be flat to down, modestly, from 2016, the new guide calls for a 6% to 8% decline. That roughly 7% decline would lap a 1.6% decline in shipments in 2016. So on a two-year stack basis, shipments are down just under 9%.

That’s no good, and it underscores the fact that Harley-Davidson is on the wrong side of secular trends.

The rise of the at-home economy has decreased the need for consumers, especially those in urban areas, to own a car. Car ownership rates are already falling, as the number of no-car households has increased by about 500,000 over the past five years. That uptick is significant because it breaks a 50-year trend of a decrease in the number of no-car households.

What’s the difference between the previous five years and the past 50 years? Uber. Lyft. Postmates. Same-day delivery. Netflix, Inc. (NASDAQ:NFLX). A plethora of services have come to the forefront, which make it possible for consumers to do everything they need to do without the hassle of owning a car.

That’s not good for Harley-Davidson, because not only does it sell motorized vehicles, it sells a niche sub-segment of motorized vehicles. If the mass market is declining, so will the niche market; and perhaps by even more as motorcycles begin to lose their “cool” factor.

The Valuation on HOG Stock Needs to Come Down

Here’s the thing about HOG stock: it still isn’t cheap enough to buy considering the secular risks described earlier.

Even after today’s selloff, HOG stock still trades around 11.4-times next year’s consensus earnings estimate. That isn’t a great multiple, especially considering earnings are down 13.1% so far in fiscal 2017.

Over the next five years, analysts peg growth at around 9% per year. Again, an 11.4-times multiple for 9% growth seems rich. Why should a stock with several secular headwinds trade at a premium to growth?

That is especially true when looking HOG’s balance sheet. Cash is up 14% year-over-year to roughly $988 million, but that pales in comparison to the mountain of debt sitting on Harley-Davidson’s balance sheet. HOG has about $7.2 billion in debt, given the company a net debt position of about $6.2 billion. That is huge considering HOG stock has a market cap of under $10 billion.

Moreover, looking at the valuation chart for HOG stock, the stock’s price-earnings multiple tends to go on long runs of multiple expansion and multiple compression. Right now, it looks HOG stock is still in the beginning of a multiple compression run. From this standpoint, we identify valuation risk over the next several months.