What a time it’s been for Harley-Davidson. In the past six months alone, the company’s stock price has increased by a massive 48.6%, reaching $27.05 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Harley-Davidson, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Harley-Davidson Will Underperform?
Despite the momentum, we’re cautious about Harley-Davidson. 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 39,200 in the latest quarter, and over the last two years, averaged 11.2% 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 7.9%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Harley-Davidson’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Harley-Davidson doesn’t pass our quality test. After the recent surge, the stock trades at 18.7× forward P/E (or $27.05 per share). This multiple tells us a lot of good news is priced in – we think other companies feature superior fundamentals at the moment. Let us point you toward the most entrenched endpoint security platform on the market.
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