UBS Says Near-Term Share Buyback From Harley-Davidson Unlikely; Moves To Sidelines

UBS downgraded the shares of the motorcycle maker to Neutral from Buy following a similar move from RW Baird, which cut the stock to Neutral from Outperform.

Shares of Harley-Davidson surged over 19 percent Friday, after speculations of a potential takeover offer from KKR & Co. L.P. KKR.

However, the shares plunged as much as 12 percent Tuesday following no confirmation from either side. On the other hand, last week's increase in the stock price triggered downgrades from UBS and RW Baird on valuation concerns.

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Downgrade And Justification

Reiterations

"We have no view on reports Friday that HOG could be the target of a take-out. We have been clear that the only value we saw in the name was due to its high FCF, good brand name and under-levered balance sheet," UBS analyst Robin Farley wrote in a note.

Farley said, at current levels, the stock is reflecting a fair amount of that value potential, and in fact, the recent stock move may make share repurchase less likely in the near term. It may be recalled that the company repurchased 13–14 percent of shares outstanding last year, as additional repurchase could drive earnings accretion.

"At current levels and Street's expectations of $3.97 in 16E EPS and $4.28 in 2017E earnings, the stock implies 13–14x '16–'17E earnings, pricing in around +2 percent '16E–'17E top line growth which compares to our flat to up +2 percent over the same period," Farley highlighted.

As such, the analyst sees "limited upside to expectations and little room for multiple expansion, given key risks of aging rider demographic and market share incursion from the revised Indian brand."

That said, the analyst reiterated his 2016 unit growth estimate of +1.5 percent, which was below the company's shipment guidance for months until Harley's last guidance cut, and stated, "We continue to be in the bottom half of guidance range of +1–3 percent."

Farley, who maintained his $57 target price on the stock, expects 2016 EPS of $4.03 a share versus consensus estimate of $3.97.

"Similarly, we remain cautious on Q2 and do not believe there is upside to retail expectations of muted growth for the year," Farley added.

For the second quarter, Farley sees EPS of $1.55, a penny higher than the consensus view of $1.54.