Why we’re not revving our engines for Harley-Davidson stock

Benj Gallander, Ben Stadelmann, and Philip MacKellar
Tuesday September 26, 2017

For more than a couple of decades, one of the most anticipated road trips for Benj has been to Port Dover, Ont. No, it was not for the famous perch, which he has eaten and can attest is yummy. A bigger catch is the Friday the 13th motorcycle rally held there since 1981, which has been described as the largest motorcycle gathering in the world and happens, you guessed it, on the unluckiest day of the year.

Summer attendance is naturally greater than the winter turnout, with more than 150,000 people taking part in the August 2010 festivities. When Benj was there in 2016, the crowds were not as great, perhaps a more muted number approaching 100,000, but the town was wall-to-wall motorcycles and people attired in leather. It was a very cool place to visit.

One brand of motorcycles that was seemingly everywhere was Harley-Davidson, a company with the great trading symbol HOG. That was a better time for this enterprise; recently, it has started to experience something akin to a flat tire.

This month, two of its unions said sayonara to their agreements, accords that extended back a couple of decades. Staffing issues were at the forefront, and chief executive officer Matt Levatich is now in the crosshairs of the International Association of Machinists and Aerospace Workers and the United Steelworkers.

The latter remains the largest union in North America, while the former is somewhat smaller but still has more than 700,000 active and retired workers. Those are a couple of big boars to butt heads with.

Harley has been around since 1903 with a long, rich history, but as one would expect, not without some speed bumps in the road.

One of the most difficult times was during the recession, when people felt that necessities were more important for their hard-earned dollars and sales of motorcycles and accessories were shuttled to the sidewalk. The stock touched below $8 (US), but then climbed up a mountain to almost $74 in 2014.

Recently, the stock price has skidded along with revenue, which led to 180 layoffs in July. It’s currently trading at about $49.

This company has been a money-making machine, which makes one wonder why the balance sheet is so poor. The debt load is huge, more than $7 billion, more than $1 billion higher than current revenue. The book value is less than $12 and the current ratio (current assets divided by current liabilities) sits at 1.26, a lower standard than a well-capitalized company.

Granted, the company does have more than $1 billion in cash and equivalents so it will not be roadkill, but the short interest is heavy — at more than 19 million shares — indicating there are many non-believers in the current stock price.

The nominal holdings and lack of buying interest on the part of insiders might indicate that they, too, wonder how much gas is left in the tank. Fortunately for those holding, there is a very attractive dividend of better than 3 percent during these still-low-interest-rate times.

In an attempt to attract a new generation of buyers and entice current riders to procure new vehicles, Harley is promoting eight new models, the largest number in its history. It is quite possible that if this does not garner huge returns, Mr. Levatich could be dusting off his curriculum vitae.

After careful analysis and consideration, we are not bullish on this HOG. Although an out-of-favour company, it does not meet our contrarian criteria as a good investment. But while we suspect that in the short term the stock price will tumble, having to cover the dividend is a primary reason to scare shorts away.

Meanwhile, Benj will head back to Port Dover. This coming Oct. 13 is too soon, and the next gathering, in April 2018 has already been deemed inconvenient. But next July just might be the ticket. The following Friday the 13th — in September 2019 — is a long ride away.