BMO Just Downgraded Harley-Davidson Because Of This Worrying Trend

• Harley-Davidson Inc HOG shares are down 28 percent year-to-date, and have plummeted 12 percent since October 15.
• BMO Capital Markets’ Gerrick L. Johnson downgraded the rating on the company from Outperform to Market Perform, while revising the price target from $76 to $54.
• Harley-Davidson’s decision to take “demand-driving actions” indicate that the issues being faced by the company are structural, rather than cyclical or temporary, Johnson said.

Harley-Davidson reported disappointing 3Q earnings and reduced its annual shipment guidance. The company also announced restructuring to eliminate headcount and reallocate resources, with an aim to boost marketing and product development in 2016.

Analyst Gerrick Johnson said that Harley-Davidson’s decision to take “demand-driving actions” to boost product and performance could be indicative of the fact that the issues being faced by the company “are not cyclical or temporary (i.e., weather or discounting by competitors), but structural.”

Following an underperformance in the motorcycle market in 2015, it is evident that Harley-Davidson needs to “up its game” and develop “more compelling products with better quality,” Johnson said. However, the changes described by management are “a multiyear process,” since new motorcycles cannot be developed overnight.

“Thus, with limited visibility, long lead times, and plenty of uncertainty, investors may choose to sit on the sidelines, unwilling to pay anything more than a discount multiple for a stock that may be dead money in the near to intermediate term,” the BMO Capital Markets report noted.