Is There More Trouble Ahead For This American Icon?

Sara Nunnally's picture

Tuesday, August 23, 2016 - 12:30pm

by Sara Nunnally

Ah, the unmistakable growl of a Harley...

Here in Wisconsin, it's Harley country. We've even got a museum that lauds the Milwaukee-based company.

But on August 18, 2016, Harley had a little less defiance in its growl. Harley-Davidson (NYSE: HOG) agreed to pay a $12 million fine for selling after-market parts designed to increase performance and power, but had the unlucky effect of emitting more emissions than was allowable under EPA rules.

It's a tricky rule...

Harley believed it was following the law by stating that the "super tuner" part was only to be used for competition. The EPA investigation found that most of them were being used on public roads.

The company sold some 340,000 of them.

In the settlement with the EPA, the company did not admit to wrongdoing, but did agree to stop selling the super tuners in its dealerships, buy back and destroy the dealerships' stocks of super tuners and deny customers' warranty claims if they are in use of the part.

There has been no official word on how much that will cost Harley, though I don't think it'll be as big a blow to the company as the emissions scandal was for Volkswagon (OTC: VLKAY).
HOG shares fell 1.7% to close down on the day of the announcement, but made up a bit of that on Friday, closing up 0.2%.

You can see the big dip and the recovery here, on this five-day chart.

The move was accompanied by heavy volume, with (predictably) lots of selling on the dip, but also lots of buying on the upswing Thursday morning.

It's almost as if the ruling didn't happen. In fact, share prices have been pushing higher ever since the beginning of 2016.

So let's put this $12 million settlement into context. It's big compared to other settlements that deal with after-market alterations and parts like this... but for Harley, a $9.67 billion company, that $12 million is about 0.6% of its most recent quarterly revenue.

Heck, that $12 million is only 4.3% of its net income for the quarter.

Not very significant in the grand scheme of things.

But now that share prices are back to trading where they were before the settlement announcement, what does that mean for investors? Did we miss out on picking up shares at a slight discount? Where is HOG headed next?

Let's take a look with a bit of a wider angle.

After the financial crisis, HOG shares soared with the rest of the market, climbing 632%. But April 1, 2014 was the top at $73.94, and share prices have tumbled sharply since then, falling to $40 a share at the start of 2016.

At the time of this writing, shares are trading at about $53.65... But where do they go from here?

In this 10-year chart, we see the massive comeback from the bottom of the financial crisis, and then the peak in April 2014. The red horizontal line represents a previous level of support, while the black line represents a potential level of resistance.

From a technical aspect, this shows that upside momentum could be limited for HOG. Shares may only be able to climb to $55-58.50 before slipping back to lower levels.

And this may even be backed up by company forecasts. Sales in the United States are soft across the industry. From HOG's most recent quarterly earnings report release:

Harley-Davidson worldwide retail motorcycle sales in the second quarter were down 1.9 percent on weak U.S. industry results. Harley-Davidson retail motorcycle sales in the U.S. were down 5.2 percent compared to the year-ago quarter, with the overall U.S. industry down 8.6 percent for the same period.

The company went on to lower its full-year shipment guidance. "While our investments to grow product awareness and ridership globally are beginning to take hold in a number of markets," Harley's CEO Matt Levatich said, "current conditions in the U.S. and economic headwinds in other parts of the world combine to raise caution for us as we continue to focus our strategy to drive demand and deliver strong returns to shareholders."

With this in mind, it's no wonder that analysts have a price target of $52.18 per share, or $1.47 lower than HOG's close on Friday.

Risks To Consider: If you're holding HOG shares already, you could see some sideways trading in a wide range, between $40 and $55, resulting in lots of headaches and anxiety. The red and black horizontal lines in the 10-year chart could be the outer boundaries of the trading range.

This range may narrow if share prices find resistance at the top of the downtrend, which may push the trading range down to between $40 and $50... Still a wide range that could be fraught with wild swings.

Action To Take: Shorter-term traders could play these swings, if they're not faint of heart. By using the upper and lower trading range lines, you can anticipate support and resistance.

That narrowing trading range may throw some extra volatility into the mix for you traders, though, so be mindful that these would be riskier trading in a sideways pattern -- never a sure thing. The HOG 57.50 put options, expiring January 20, 2016 closed at $3.00 per contract. A mere drop to $52 would make them worth $8.18. A drop to $50 would force these put options to nearly $9.60.

A steep drop to $40, and these put options would skyrocket to $18.25.

Editor's Note: If you're interested in trading but unsure of where to start you'll want to see this free webinar. In just eight minutes, Amber Hestla reveals how she's closed 134 winning trades out of 140 -- and how you could do it too, starting this Thursday. Click here to watch it now.

Sara Nunnally does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.