Finally, there was some modestly positive news out of Harley-Davidson (HOG) , which announced second-quarter earnings yesterday. While revenue of $1.53 billion was down 3.2% year over year, the iconic motorcycle maker beat consensus estimates by $120 million.
To be clear, Harley-Davidson is a huge company compared to many that I own or follow, with a good-size consensus that includes more than a dozen analysts. The company also handily beat consensus earnings estimates, registering earnings per share of $1.52 versus the $1.34 consensus.
While shares were up about 8% on the day, this represents just a minor victory for Harley-Davidson, which has been suffering on a couple fronts.
First, revenue has been on the decline, as second-quarter results indicate. The company broke the $6 billion revenue barrier in 2014 but has not been back to that level since. There seems to be declining consumer interest in bikes, especially among the younger crowd. The company also has not been hitting on all cylinders in terms of design, and material prices have risen.
Second, tariffs have been a huge, more-recent overhang on the stock, and the company has been rushing inventory to Europe to get ahead of tariff implementation. Part of yesterday's mini-rally in the stock may have been due to Harley-Davidson lowering European Union tariff cost estimates for the rest of the year from the range of $30 million to $45 million to the range of $30 million to $35 million. There is a double whammy for Harley-Davidson when it comes to tariffs, though; steel and aluminum tariffs are expected to add $15 million to $20 million in costs.
Harley-Davidson took some flak from President Trump last month when it announced it would move some production to Europe, a step primarily designed to avoid the average $2,200 tariff per bike, which was a retaliatory move by the EU.
I still believe the tariff issue is noise; it may continue to be a huge headwind for the stock near term, but ultimately will blow over. We don't know if tariff talk is all bluster or not, and even if it sticks, companies will adjust and consumers will adjust.
The bigger issue for Harley-Davidson is reinvigorating interest in bikes. Years ago it was believed that interest in recreational vehicles was going to slide into oblivion, but take a look at Winnebago Industries Inc.'s (WGO) revenue, which has exploded. I don't believe HOG is done just yet.
Harley-Davidson shares currently trade at about 12.5x next year's consensus estimates, and the stock yields 3.3%. While debt appears quite heavy at more than $6 billion, keep in mind that the company is in the financing business, and financing receivables would cover that debt. There's no doubt that an economic downturn and rising consumer defaults could be devastating (take a look at the 20008-2009 era), but at this point default rates are reasonably low. Longer term, perhaps there's an opportunity to sell off the financing business.
Lastly, the company has been buying back stock over the years, reducing shares outstanding by about 29% over the past seven-plus years. There was little buyback activity during the second quarter, however, as the company chose to conserve cash, which stood at $979 million.
I am warming up to this story -- a broken growth company with some headwinds, and unknowns. I'd love to get it at 10x next year's earnings, or about $36 a share, but not sure whether we'll see those levels, and I may need to be a bit more flexible.