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Bear of the Day: Harley Davidson (HOG)

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Harley Davidson (HOG - Free Report) is a quintessentially American institution. Its iconic motorcycles have been copied countless times by virtually every other manufacturer, yet the company continues to enjoy a fiercely loyal base of customers who wouldn’t dream  of riding any machine other than their beloved “hog.”

Over the past few years the company has been successfully battling challenging demographic trends as its core audience grows past the age at which people generally buy motorcycles. They’ve also been adapting to a new reality in which internal combustion engines are increasingly being replaced by high-tech battery-powered electrics - recently introducing their own electric motorcycle model featuring incredible performance specs.

It’s difficult to root against a company that has so effectively combined tradition and innovation to remain not only relevant but dominant in a rapidly changing world. Unfortunately, the current environment is shaping up to be very difficult for Harley Davidson.

The inescapable truth is that a Harley Davidson motorcycle is a very expensive indulgence. Though they do offer a stripped-down 500cc model that starts at just $6,899, the average price of a new Harley is more than $20,000 and custom options can push the final sales price of the more desirable high-end models north of $40,000.

Predictably, Harley Davidson’s sales tend to be strongest when general economic conditions are good. A Harley is basically the ultimate discretionary purchase. Nobody really needs one, but when unemployment is low, wages are rising and consumers feel good about their financial position, a whole lot of people really want one.

Unfortunately, thanks to an economic shutdown as a result of the spread of Covid-19, more than 26 million Americans have filed for unemployment benefits over the past month. People who had no reason to feel anything except secure in their employment and financial position earlier in the year are now facing a new reality in which they have no idea when (or if) the job they had will come back.

As they stretch to make their savings cover basic day-to-day expenses like food, housing and health care, they’re extremely unlikely to splurge on a luxury purchase like that dream motorcycle.

In tough times, the legendary quality of the Harley Davidson line actually works against the company because the robust market for used cycles allows potential customers to pick up their desired machine in lightly-used condition - and at a significant discount to MSRP.  

Harley Davidson is scheduled to report first quarter results on Tuesday April 28th. Though the company will be coming off four consecutive significant beats of the Zacks Consensus Earnings Estimate, those prior results were during significantly different times. Next week we’ll get our first peek at the effect of the “new normal” on Harley sales - and it’s likely to be ugly.

The estimates call for a net of $0.50/share on sales of $1.07B – reductions of 37% and 11%, respectively from the year-ago period. Even more important will be management guidance about the rest of 2020.

A slew of downward revisions expect 2020 sales to be off 16% and net earnings to be a full 50% lower than 2019. Just 90 days ago, the Zacks Consensus Estimate for the full year was $3.39/share. Now it’s $1.32/share.

This situation is certainly not the fault of Harley Davidson management. They’ve done an extraordinary job of adapting to a shifting landscape and continuing to offer vehicles and accessories that remain in high demand. Unfortunately, the recent viral outbreak is going to present a totally unique challenge.

Based on a long history of innovation and resilience, it would probably be foolish to bet against Harley Davidson in the long term. For the time being however, things are going to be tough.

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