Harley-Davidson’s 19.5% return over the past six months has outpaced the S&P 500 by 11%, and its stock price has climbed to $24.78 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Harley-Davidson, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Harley-Davidson Will Underperform?
Despite the momentum, we’re swiping left on Harley-Davidson for now. Here are three reasons we avoid HOG, plus one stock we’d rather own.
1. Decline in Motorcycles Sold Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Harley-Davidson, our preferred volume metric is motorcycles sold). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Harley-Davidson’s motorcycles sold came in at 37,300 in the latest quarter, and over the last two years, averaged 14.6% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Harley-Davidson might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Harley-Davidson has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 10.6%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, Harley-Davidson’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Harley-Davidson, we’ll be cheering from the sidelines. With its shares topping the market in recent months, the stock trades at 29.5× forward P/E (or $24.78 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of Harley-Davidson
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