Personal Finance

Did Harley-Davidson Stock Deserve to Be Up 32% in 2016?

HOG Chart

Considering Harley-Davidson (NYSE: HOG) hasn't been able to sell more motorcycles from one year to the next for the past two years, the fact its stock has grown in value by 32% in 2016 should cause investors pause to consider if the increase was justified.

Data source: YCharts.

A bad case of road rash

Harley-Davidson motorcycle shipments have declined 26% since they hit a record high of 361,600 in 2006, coming in just over 266,000 bikes last year, and are forecast to register somewhere between 264,000 and 269,000 motorcycles for 2016. That's likely just wishful thinking , because if we extrapolate the sales Harley has made over the first three quarters of the year, it looks as if it will miss those targets by a wide margin.

Motorcycle revenue fell 3% in the third quarter to $789 million, while unit sales in the U.S. market, which represents two-thirds of its total business, tumbled 7% for the period. And despite holding the line on the discounting rival Polaris Industries (NYSE: PII) and others in the industry were engaged in to steal or maintain market share, profits fell 7% on a per-share basis.

Yet that's only because Harley's heavy share repurchases are masking the true impact of its stumbling business. Buying back millions of shares concentrates the bike maker's net profit among the fewer number still outstanding.

Harley Davidson Hog Stock Chart Sales Motorcycles Bikes

Data source: Harley-Davidson quarterly SEC filings.

The motorcycle industry is in the midst of a slowdown , one that even Polaris is feeling. On its third-quarter earnings call with analysts, Polaris CFO Michael Speetzen forecast that motorcycle sales would only rise by low-single-digit percentages, which is lower than was previously expected, because of the spreading weakness in the industry. Harley said it was causing it to "streamline our operations to be even more focused, aligned, and agile."

So what we're looking at is a motorcycle manufacturer that consistently pumps out more bikes than the market can handle while its own sales fall.

In short, the discount Harley-Davidson got for its shares when it bought back its stock was unwarranted because their subsequent increase in value wasn't justified based on its business. With the bike maker's fourth quarter now at an end, if sales are as bad as expected -- not least because it's historically one of its weakest quarters -- it doesn't bode well. The gains Harley-Davidson recorded in 2016 may soon vanish.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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