Harley-Davidson (NYSE:HOG) reported weak sales, lower profits, and cut its forecast for the rest of the year Thursday. And yet, Harley-Davidson stock went up -- ending the week 5% higher than it began it.
Several analysts responded to the news by downgrading Harley stock. And yet, to the analysts at BMO Capital, the fact that Harley shares went up, not down on the bad news looks like proof positive that the shares are now so cheap that even bad news can't make them go any lower -- and Harley-Davidson stock is poised for a rebound. Accordingly, this morning BMO upgraded Harley-Davidson stock to outperform and assigned the stock (which currently costs just $52 and change) a target price of $66.
Is BMO right? Are Harley shares going up 27%? Today, we're going to look at three things that suggest they very well might be.
Here's what you need to know.
1. Sales slump
Harley-Davidson reported weak sales of $1.86 billion last quarter, up minimally from $1.82 billion in the year-ago quarter. Profits per share grew 8% to $1.55, beating estimates, but only because stock buybacks helped to concentrate the company's net profit among fewer shares outstanding. Net profit at the company declined 7%.
2. Things are rough all over
And yet, when viewed against the backdrop of the rest of the motorcycle industry, Harley's performance wasn't actually all that bad. Overall in the U.S., motorcycle industry sales declined 9% last quarter. Harley's own drop in domestic sales was just 5%. As a result, Harley-Davidson's U.S. market share appears to have increased. (See my fellow Fool Rich Duprey's analysis on what's happening at Harley rival Polaris Industries (NYSE:PII). Hint: Polaris's sales growth is stalling.)
Meanwhile, Harley-Davidson scored a 4% gain in sales internationally.
3. What does it mean for Harley?
Reviewing all of the above, BMO Capital has decided to break from the pack of analysts who downgraded Harley-Davidson on its shrinking sales, and upgrade the stock instead as a "good contrarian play." As explained on TheFly.com this morning, most of Wall Street today is "extremely negative" on Harley-Davidson stock. Multiple downgrades followed the earnings release, and 16% of the company's shares are currently sold short.
Despite that fact, Harley-Davidson stock declined not at all after the earnings report -- and the downgrades -- rising instead. BMO argues that this means there is no desire among investors to sell Harley-Davidson stock at today's prices, but investors might be getting ready to buy.
Accelerating development of "consumer focused" products, says the analyst, will grow Harley's sales. And the company is holding the line on pricing, which means that with profit margins intact, Harley should reap the full benefit of any growth in sales as its new bikes hit the market.
Bonus thing: Valuation
Could it be that the time to buy Harley-Davidson stock is now, before this predicted good news gets confirmed?
It's hard to say. At 13.5 times earnings, Harley-Davidson stock certainly looks cheap enough. Granted, free cash flow at the firm remains rather weak. Harley generated only $660 million in positive cash profits over the past year, versus reported net income of $714 million. But even so, that works out to a price-to-free cash flow ratio of only 14.6 on the stock -- again, not expensive.
Meanwhile, analysts polled by S&P Global Market Intelligence see Harley growing its profits at a respectable 12.5% clip over the next five years, and the stock pays a decent dividend, too -- 2.6% -- paying investors while they wait for the growth to return. This all implies that, in the worst case, Harley-Davidson shares are not terribly overvalued today. In fact, they might even be a bargain.
Fool contributor Rich Smith owns shares of Harley-Davidson. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he currently ranks No. 309 out of more than 75,000 rated members.
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