Motorcycle maker Harley-Davidson trades as if its declining sales will never recover, says Citigroup analyst Shawn Collins. But Harley’s cheap valuation and its new chief executive make the stock a good bet, Collins says in a Monday report that initiates coverage of the stock with a Buy rating.
The Citi analyst thinks Harley stock (ticker: HOG) can rise more than 30% to $33, from its Monday morning level of $25. If margins return to their historic peak, the shares might even see $40, Collins says.
”[W]e find the risk/reward compelling that a turnaround can take place at Harley-Davidson,” Collins writes. “At current valuation levels, Harley does not need to gain significant market share or grow new lines of business in order reward an investor.”
Collins is greatly impressed by Jochen Zeitz, who became Harley’s chief in May, after temporarily stepping into the role after longtime CEO Matt Levatich resigned. From 2001 to 2006, Zeitz executed a turnaround at the sporting goods maker Puma—tripling its sales and its stock price.
Zeitz’s marketing savvy will help Harley stabilize, or even turn around, its sliding revenues, Collins believes. The U.S. market for large-engine bikes has fallen 50% since 2006, as younger generations fail to follow aging baby boomers down the open road. Harley holds half that big bike market, but changing demographics and tastes have slowed its sales in each of the last five years. An international expansion plan was foiled by President Donald Trump’s tariff wars.
This year will be uglier still, the analyst warns. The Covid-19 shutdown will knock Harley’s 2020 production down 20%, he figures.
But all these challenges are well-known and priced into Harley stock, says Collins. Harley shares now trade at 14-times this year’s expected earnings. The stock goes for just 9-times this year’s expected cash flow, compared with around 12-times at other powersports and recreational vehicle firms.
An unappreciated part of Harley’s business is its finance unit, that can borrow at 3% and then lend to motorcycle purchasers at 10%. Valuing that captive finance business at 8-times its 2022 earnings, Collins thinks it’s valued at $1.5 billion.
If CEO Zeitz can restore some power to Harley’s brand and stabilize its motorcycle sales, its bike manufacturing should be worth another $3.6 billion. Summing up the company’s two parts, Citigroup sees the stock returning to at least $33.
”The new CEO has done this once at PUMA sporting goods and we are optimistic that he can orchestrate a stabilization (or turnaround) of the company’s operations,” Collins says.