Why We Don't Like Harley-Davidson, Despite The Citigroup Upgrade

Apr.11.12 | About: Harley-Davidson, Inc. (HOG)

Today, motorcycle maker Harley-Davidson, Inc. (HOG) was upgraded by Citigroup analysts; the firm lifted its rating from "Neutral" to "Buy" and raised its price target to $55 from $50. The recent target suggest a 17 percent upside from the stock's Monday closing price of $46.92. Citigroup noted that recent retail trends at the motorcycle maker should be encouraging to investors.

We'll take a look at HOG's financials and see if we are as bullish as our Citigroup counterparts.

Sales the past five years decreased at an annual pace of 3 percent, while earnings decreased 9.9 percent annually. Earnings this year increased 111 percent and are forecasted to increase 23.9 percent next year. The next five years earnings are forecasted to increase at an 11.7 percent pace.

Gross, operating, and profit margins are 37.2, 15.6 and 10.2, respectively. The return-on-equity is 23.7 percent. Institutions own 80.2 percent of shares. Debt is 236 percent of equity and price-to-earnings is 20.1. Forward price-to-earnings is 13.9.

Shares are trading at roughly the rising 50-day simple moving average. Shares are in the mark-up stage, where prices rise following a period of accumulation.

HOG: Analysis

Long term, the debt level should be worrying to investors with the company highly leveraged; financial leverage is roughly 4 (3.9 to be exact). The long-term solvency of the firm is a question and equity investors may not want to be around for a potential insolvency. The issue lagged during this cycle, a sign of the weakness of the fundamentals. Medium term, the P/E ratio is 20, a level that we would distribute shares of the issue.

Conclusion

This isn't a company that should be owned long term. That being the case, it shouldn't be owned medium term, expect for by nimble investors and even then distribution is likely near term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.