Here's Why Harley-Davidson Stock Is Behaving Erratically

Currently, Credit Suisse CSGN –16.45% is experiencing a lot of volatility because of the banking crisis that has consumed SVB Financial and Signature Bank. As a motorcycle manufacturer trading like a bank, Harley-Davidson HOG –1.27% stock has also been hit.

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There's something odd about that, and investors could benefit from it.

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A lockstep price trend has been observed between Harley-Davidson (HOG) and the iShares U.S. Community Bank ETF (IAT) for a couple of weeks. A rise in the ETF correlated with a rise in Harley stock. In the event that it dropped, Harley stock did as well.

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Despite its poor performance, Harley stock isn't quite as low as the regional bank ETF. The Harley Davidson stock price has declined nearly 20% from its March highs through Tuesday's trading. Over the past three months, the ETF has lost almost 30% of its value.

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There is a very clear reason, Harley, along with some other manufacturing stocks, trade with banks during times of stress: their consumer finance operations are very large. A small bank is attached to each manufacturing organization.

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Overall, the finance divisions are small. In terms of banklike assets, Harley-Davidson, Ford Motor (F), General Motors (GM), Caterpillar CAT -3.50% (CAT), and Deere (DE) hold approximately $350 billion. A motorcycle buyer may be able to take out one of these loans as well as a tractor buyer, a backhoe buyer, and a tractor buyer.

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Although Harley Davidson is a manufacturing company, it does not carry the same level of risk as banks do. The organization does not have any deposits that can be withdrawn. Each of them finances its loan operations with a combination of debt, asset-backed securities, and equity.

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It is estimated that the five manufacturers' lending operations hold about $36 billion in equity.

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During Tuesday's CONEXPO conference in Las Vegas, Caterpillar CEO Jim Umpleby said Cat Financial is very conservatively managed. Cat's debt payments match its customers' payments in duration, which means the company's assets and liabilities match.

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According to the CEO, previous dues are at record lows. This is a sign that his lending book is not under stress.

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In response to Trade Algo’s questions about their lending operations, Ford, GM, and Deere said they do not rely on deposit funding. There are financials for Harley's lending operation available for analysis, but Harley did not respond to a request for comment.

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It's hard to find a manufacturer with a lending arm that hasn't been hit harder than Harley Davidson. The shares of Ford and General Motors have fallen, respectively, by 9% and 14%, from the highs they reached in March. There has been a decline of around 12% in shares of Cat and 7% in shares of Deere.

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4% is off the highs of March, according to the Dow Jones Industrial AverageDJIA -1.75%.

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Harley's underperformance is also readily explained by the fact that it makes more money from loan operations than from sales.

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The lending operations of Harley-Davidson contributed about 35% to its operating profit in 2022. A total of 19% was averaged among the other four businesses. The finance operations of GM accounted for approximately 28% of the 2022 operating profit.

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A total of $9 billion in income was reported by the five lending units in 2022.

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Considering the stock market is down and there are no deposits, perhaps Harley's shares will rebound soon.

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As a minimum, the declines should discourage investors from selling Harley stock. The shares of Harley were upgraded to Hold from Sell by Jefferies analyst Anna Glaessgen on Wednesday. With a price target of $39 per share, she remained unchanged.

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As a result of the declines, Glaessgen believes the stock is now more fairly valued.

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The analyst in a Wednesday report reiterated that his view on fundamentals remains unchanged. "Despite a shaky macro backdrop and HDFS risks, we remain cautious on retail demand stabilization," he concluded.

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The average analyst rating for Harley stock is Buy, with 38% rating shares as a Buy. For the S&P 500SPX –1.59%, the average Buy-rating ratio is about 58%. Analysts expect the share price to reach $52 per share on average. Now that the share has been upgraded from Sell to Hold, no more analysts rate it as Sell.

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The bank crisis, inflation, or rising interest rates could cause consumer spending to slow down before investors jump in. Motorcyclists and car buyers may be adversely affected by all these factors. The investors should also consider whether Cat will receive high spending from mining and construction companies and whether Deere will receive high spending from farmers.

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According to Wall Street's projections, Harley, Ford, and GM's operating profits will decline in 2023. According to analysts, Caterpillar and Deere are expected to grow.

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In terms of estimated 2023 earnings, Cat and Deere trade at 14 times and 13 times, respectively, their estimated growth. A Ford trades for 7.5 times its earnings, while a GM trades for 5.7 times its earnings. Estimated earnings for Harley-Davidson in 2023 are 8.4 times the stock price.

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The Harley stock would trade at about 10 times estimated 2023 earnings if it went back to March highs of about $48, providing an opportunity for investors who believe the worst is over for the regional banking industry.

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Premarket trading on Wednesday saw Harley stock drop about 1.5%. Premarket trading on Wednesday saw S&P 500 and Dow Jones Industrial Average futures drop about 1.9% each.