Harley-Davidson: Opportunity Exists to the Downside

| About: Harley-Davidson, Inc. (HOG)

HOG missed earnings estimates earlier this week. It reported EPS of $.11 vs. an estimate of $.21. Thus far on Yahoo Finance, the analysts' estimates for Q4 2009 have been lowered to -$.26 from -$.16. This means HOG now stands to earn $.43 in FY2009. This translates into a FY2009 P/E of 65 based on Friday's closing price of $27.86. This P/E is far too high for a company whose earnings and revenues seem to be going in reverse instead of growing. Earnings were down more than 80% and sales were down 21% year over year (i.e. revenues are down).

HOG announced it was discontinuing two product lines -- Buell and MV Agusta -- in order to focus more strongly on the Harley-Davidson brand. We'll have to see how good a strategy this turns out to be. Many people have expressed doubts that the Harley-Davidson brand will continue to have the same appeal as the baby boomer generation ages out of the motorcycle buying demographic. Those same people have suggested that both Buell and MV Agusta had more appeal to younger generations.

HOG has announced some improvements to its HDFS unit. It has made loan qualifications more stringent. It has started to ask for bigger down payments. However, this does nothing to help most of the $5.18B in loans held for investment at the end of Q3. It also likely will prevent some customers from buying Harley’s. Further the $5.18B in loans still represents a huge threat to HOG/HDFS as unemployment continues to rise. Moody's is predicting that the credit card charge off rate will peak in about mid 2010. That will likely be the peak of HDFS' problems too. HDFS lost $31.5M in Q3. That was $67M worse than a year ago. It is likely to do much worse before things perhaps begin to improve in the credit business after the middle of 2010.

In the last 90 days the predictions for 2009 EPS have come down from $.88 to $.46 (or $.43) for FY 2009. The predictions for 2010 have not moved down nearly as much. However, as 2010 nears that eventuality seems only a matter of time. I would not be surprised to see HOG lose money in 2010. I would not be surprised to see HOG enter bankruptcy. HOG had a very hard time finding money for HDFS for the 2009 fiscal year (about $1B). HOG will perhaps have a harder time in 2010. HOG seems expensive with a PEG value of 2.8566, above the Recreational Products industry median PEG of 1.22. Considering the FY2009 PE of 65, the PEG doesn’t give one much hope.

On a technical basis HOG is currently above its upper Bollinger Band. It is very likely to come down from there. It is about $4 above its 50-day sma. It should very easily return to there, especially if the market retraces. If the market goes sideways, HOG should still fall. If the market continues upward with strong Q3 earnings, then it might be best to get out quickly. This should be a good short. Any positives in EPS have come from cost cutting and added efficiencies. This cannot go on forever. HOG needs to produce revenue growth. There is no sign of that yet. Rather HOG is likely going to be severely challenged in 2010 as the credit charge off rates skyrocket. Does a stock, which is at risk of losing money in 2010 (or at best growing very little in 2010), deserve to be trading at 65 times 2009 earnings. I think not. The dividend is no reason to keep this stock. It pays a paltry 1.45%, which is considerably below the 2.38% average currently paid by the S&P500.

The Williams %R and the RSI both indicate that HOG is over bought. The SPY is looking like it may retrace soon. Nothing is one hundred percent certain in the stock market, but betting HOG to go down seems like a good percentage bet at this time. Still it might pay to keep a tight upper stop as the overall direction of the market is uncertain; and HOG has a Beta of 2.3. The recent rapid rise seems likely to reverse itself given the negative earnings news. I think the initial negative reaction to the earnings news was the correct one. The “dip buyers” have since pushed the stock price up by about $4. It seems likely that the fundamentals will soon override the unreasonable optimism of the “dip buyers”. This should allow for a very nice profit for those who short. Perhaps GS was a big “dip buyer”? Perhaps GS is now planning to make good money to the downside?

Below if the 3-month chart of HOG:

Click to enlarge

Disclosure: The author currently has a small short position in HOG.