RBC 'Downshifts' To Underperform In Harley-Davidson

RBC Capital’s Joseph Spak expressed concern regarding the tough industry demand environment, as well as Harley-Davidson Inc HOG “overshipping and creating elevated dealer inventories that could take multiple quarters to resolve.”

Spak downgraded the rating on the company from Sector Perform to Underperform, with a price target of $43.

The analyst also expressed concern regarding credit overearning and the 2017–18 consensus forecasts remaining too high.

Weak Industry Outlook

Spak mentioned that the industry outlook continues to be challenged, with the 2Q16 motorcycle industry declining 8.6 percent in 2Q16 and Harley-Davidson reporting a retail decline of 5.2 percent year-on-year.

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“The share gain was encouraging but we have a suspicion this could be a case of some competitors having tough comps,” the analyst stated.

Guidance Cut

Management indicated that demand was expected to remain soft into 2017, while reducing the 2016 shipment guidance and mentioning that margins would remain pressured.

The motorcycle operating margin guidance for 2016 was also lowered, driven by lower absorption on lost production, higher than anticipated manufacturing expenses and unfavorable mix.

Credit

Spak also noted that 30-day delinquencies at HDFS increased to 3.16 percent in 2Q16, from 2.71 percent in 2Q15, reaching the highest 2Q level since 2011.

Annualized loss experienced rose to 1.5 percent, the highest for 2Q since 2010.

“It’s not that we are overly concerned as we see huge credit risk, but we do believe this is a clear signal that HDFS has been over-earning,” the analyst explained.

At time of writing, Harley-Davidson was seen trading at $50.42, down 1.16 percent on the day.

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