Option Trade
Harley-Davidson Inc (NYSE:HOG) Calls 
Monday, July 20, 2015

**OPTION TRADE: Buy the HOG Nov 2015 55.000 call (HOG151120C00055000) at or under $3.20. Place a protective stop loss at $1.30, and a pre-determined sell at $6.00.

by Ian Harvey

July 20, 2015


Harley-Davidson Inc (NYSE: HOG), the parent company for the groups of companies doing business as Harley-Davidson Motor Company and Harley-Davidson Financial Services (HDFS), will release its second-quarter numbers on July 21 before the market opens. Analysts have forecast earnings of $1.40 per share, down from $1.62 during the same period last year. The stock is down 15.1% on the year.

Harley-Davidson is expected to post a year over year drop in earnings during the second quarter, but the earnings drop is expected to be short-term, and analysts have forecast the company to grow earnings by 13% in 2016 versus 2015. The good news is that the earnings drop for Q2 has already been priced into the stock, so as long as the company is able to hit the estimate the stock should be OK following the report. The stock hit a low in June, but is starting to regain momentum, most likely a result of the stock's low valuation. HOG is now trading with a P/E of just 14.2, and at such a valuation there is little downside risk to the stock at the current time.

The $11.6 billion motorcycle maker Harley-Davidson owns one of the most iconic brands in the recreational vehicle space. The firm is the world's biggest manufacturer of heavyweight motorcycles, selling nearly 268,000 new bikes at retail across the globe in 2014. In the last four years, H-D has been able to grow its profits by more than 54%.

Harley-Davidson's brand power is a major component of its success. Even though brand licensing and merchandise make up a relatively small share of H-D's total revenues, the fierce brand loyalty among Harley riders that comes with those merchandise sales is significantly more valuable. In recent years, Harley has gone out to court non-traditional customers -- such as younger riders, women and minorities -- those "outreach customers" have been a big contributor to sales, growing twice as fast as H-D's core customers.

Today, international sales are also a very large contributor to Harley's overall performance. While the U.S. is still the firm's biggest market, international sales accounted for more than 36% of the firm's total revenues. With persistently low interest rates, a captive finance arm and upticking consumer spending, the stars are aligned for the sales trend in Harley-Davidson to continue in the second half of 2015.

Technical Details

Harley-Davidson closed trading on Monday at $59.94, down 0.04%. Harley-Davidson has a 52 week low of $53.04 and a 52 week high of $70.41.

The stock has a 50-day moving average of $55.75 and a 200-day moving average of $59.72.

The company has a market cap of $11.58 billion and a price-to-earnings ratio of 13.99.

Technical indicators for HOG are bearish and the stock is showing signs of a possible trend reversal.


Previous Earnings

Harley-Davidson last posted its quarterly earnings results on Tuesday, April 21st. The company reported $1.27 EPS for the quarter, beating the Thomson Reuters consensus estimate of $1.24 by $0.03. The company had revenue of $1.67 billion for the quarter.

During the same quarter in the prior year, the company posted $1.21 earnings per share. The company’s quarterly revenue was down 3.9% on a year-over-year basis. On average, analysts expect Harley-Davidson to post $3.98 EPS for the current fiscal year and $4.50 EPS for the next fiscal year.

Future Earnings

Harley-Davidson should report EPS of $1.43, beating the Street by $0.04. The company’s revenue estimates on estimize.com suggest a mean figure of $1.67 billion, reflecting the wide expectation for sales to remain in line with the consensus. Harley-Davidson is expected to post a 13.92% YoY decline in earnings, along with another 8.90% YoY decrease in sales for this period.

Harley-Davidson reported $1.27 as its EPS for 1QFY15, surpassing the consensus estimate by $0.03. Its sales, however, fell $66 million short of the consensus forecast, as they closed in at $1.51 billion. The heavy bike maker has beat the Street on its bottom-line seven times during the last eight quarters. However, it has missed consensus sales estimates five times during the same period.

Why Harley-Davidson Inc?

The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Automobiles industry and the overall market, Harley-Davidson Inc's return on equity significantly exceeds that of both the industry average and the S&P 500.

47.74% is the gross profit margin for Harley-Davidson Inc which is considered to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 16.13% significantly outperformed against the industry average.

Harley-Davidson Inc's earnings per share improvement from the most recent quarter was slightly positive. The company has demonstrated a pattern of positive earnings per share growth over the past two years. It is felt that this trend should continue. During the past fiscal year, Harley-Davidson Inc increased its bottom line by earning $3.87 versus $3.27 in the prior year. This year, the market expects an improvement in earnings ($3.99 versus $3.87).

The net income growth from the same quarter one year ago has exceeded that of the S&P 500, but is less than that of the Automobiles industry average. The net income increased by 1.5% when compared to the same quarter one year prior, going from $265.92 million to $269.85 million.

Regardless of the drop in revenue, the company managed to outperform against the industry average of 6.4%. Since the same quarter one year prior, revenues slightly dropped by 3.1%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.

Analysts Opinions

Analysts are mostly bullish in their ratings on Harley-Davidson.

Harley-Davidson has been given a “BBB” credit rating by Morningstar. The investment research firm’s “BBB” rating indicates that the company is a moderate default risk. They also gave their stock a four star rating.

TheStreet Ratings team rates Harley-Davidson Inc as a Buy with a rating score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate Harley-Davidson Inc (HOG) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its notable return on equity, expanding profit margins, growth in earnings per share, increase in net income and attractive valuation levels. We feel its strengths outweigh the fact that the company has had lackluster performance in the stock itself."

The company has also been the subject of a number of other research reports:-

• Analysts at DA Davidson downgraded shares of Harley-Davidson from an “outperform” rating to a “sector perform” rating in a research note on Wednesday, July 8th.

• Analysts at RBC Capital downgraded shares of Harley-Davidson from an “outperform” rating to a “sector perform” rating and lowered their price target for the stock from $66.00 to $59.00 in a research note on Wednesday, July 8th.

• Analysts at Goldman Sachs raised their price target on shares of Harley-Davidson from $66.00 to $68.00 and gave the company a “buy” rating in a research note on Thursday, June 18th.

• Analysts at Weeden downgraded shares of Harley-Davidson to a “neutral” rating and lowered their price target for the stock from $74.00 to $57.00 in a research note on Thursday, June 11th.

• Finally, analysts at Wedbush downgraded shares of Harley-Davidson from an “outperform” rating to a “neutral” rating and lowered their price target for the stock from $74.00 to $57.00 in a research note on Thursday, June 11th.

Of the 24 analysts currently covering the stock, 13 recommend a Buy, while 10 give it a Hold rating. The 12-month price target for the shares is $65.00, suggesting an18.31% upside over the previous closing price of $54.94. Harley-Davidson stock has fallen 1.40% over the last three months.


Despite forex headwinds in the international segment, Harley-Davidson is poised for success in the near future. Harley has no branding issues and is already seen as one of the more renowned motorcycle companies in the sector. In addition to vehicle sales, Harley offers apparel and other lifestyle products with the brand name on them, strengthening customer loyalty while solidifying additional revenue streams.

Harley is a company to watch what can be done with international market penetration, as the current motorcycle market in the United States is dominated by Harley.

As to future earnings, HOG has a solid earnings track record, and has not posted a negative earnings surprise since fourth-quarter 2012. Earnings tend to fall within a penny or two of the consensus, and should the second-quarter results follow that trend the stock will most likely continue to make back some of its recent losses.

Therefore, based on the facts above the following option trade is recommended…..

**OPTION TRADE: Buy the HOG Nov 2015 55.000 call (HOG151120C00055000) at or under $3.20. Place a protective stop loss at $1.30, and a pre-determined sell at $6.00.

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