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Why Harley-Davidson Stock Jumped 13% in September

By John Ballard - Oct 7, 2019 at 2:59PM

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Management has a plan to sidestep higher tariffs.

What happened

Shares of Harley-Davidson (HOG 2.60%) gained 12.8% last month, according to data provided by S&P Global Market Intelligence. The gain erased the drop of 10.8% in August, when trade war tensions escalated between the U.S. and China. The classic motorcycle brand has been struggling over the last year, partly due to that trade war Things got really bad for Harley-Davidson when the E.U. raised tariffs from 6% to 31% on motorcycles exported from the U.S. in 2018. 

However, fears about the potential impact on the economy eased when news broke early in September that China and the U.S. agreed to get back to the negotiating table. Given that Harley-Davidson trades at a low valuation, investors were quick to scoop up what looked like a bargain.

Two motorcycle riders on the highway in the desert.


So what

Harley-Davidson has been ramping up production in Thailand to get around the tariffs from the E.U., but the second-quarter earnings results released in July showed revenue down 8.4%, with operating income down 25.8% year over year. Management attributed the weak results to lower shipments, unfavorable sales mix, and tariffs. 

Thailand production is expected to start in October, which will eventually bring Harley's tariff rate back to 6%. But it can't come soon enough.

Now what

The company expects the lower tariff rates from Thailand to kick in starting in the second quarter of 2020, at which point management believes the tariff problem will be behind them. Beyond that, management has a plan to return to growth and improve operating margin by 2022. This includes investing in innovation and optimizing manufacturing to cut costs. 

One headwind that Harley-Davidson must overcome, however, is the declining number of U.S. residents who ride motorcycles. Harley was a growth machine up through 2007, as strong demand from baby boomers drove increasing sales. But over the last decade, baby boomers have gotten older, and millennials are not as interested in motorcycles.

The company has a plan to gain 2 million new riders by 2027, but it will be a challenge. However, with the stock trading at a cheap valuation of just 9.8 times next year's earnings estimates, any signs of growth would likely send the stock soaring.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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