Here's Why You Should Avoid Harley-Davidson Stock

The Wall Street adage "Sell in May and go away" definitely applies to Harley-Davidson (HOG) - Get Report , a dangerous and depressed stock that is poised for further steep declines this year.

The legacy U.S. motorcycle maker may have recently beaten earnings estimates, but its loosening grip on market share, burgeoning debt and increasing pressure from competition all make it a weak stock.

Harley-Davidson's fiscal first-quarter earnings were $250.5 million, beating analyst estimates of $239 million. However, earnings fell from $269.9 million a year earlier.

Worldwide motorcycle retail sales in the quarter rose 1.4% from a year earlier, bolstered primarily by Europe, the Middle East and Africa (EMEA), as well as the Asia Pacific region.

However, in the Americas region, only Canada registered a sales increase, while the two biggest markets for the company, the United States and Latin America, shrunk slightly and hugely, respectively. The Americas region accounts for 70% of worldwide sales, of which the United States makes up a staggering 89%.

Meanwhile, sales of motor vehicles at companies such as Ford Motor and General Motors are soaring.

After Harley-Davidson's results were announced April 19, the stock fell 1.2%.

Harley-Davidson can blame currency rates, the oil crash and discounting tactics by competitors for its sales decline until the cows come home, but the fact remains that the appeal of its motorcycles is diminishing, particularly among younger people. In fact, male baby boomers and millennials seem to be flocking to motorcycles made by rivals such as Polaris Industries.

The Indian brand of Polaris Industries racked up an impressive quarter and has eaten into Harley-Davidson's market share, according to Longbow Research analyst David Macgregor, 

Polaris Industries' revenue has continued to climb since 2009, and Honda Motor's sales have also risen.

Harley-Davidson's answer to declining sales is increasing its marketing and product development investments this year to trigger demand among millennials. The company will direct investments to increase product and brand awareness; attract new customers in the United States; increase and enhance brand access; and accelerate the cadence and impact of new products.

But marketing efforts will only achieve so much if the product itself is losing its edge. In addition, in order to stabilize and increase the company's fluctuating operating income Harley-Davidson needs a more sophisticated and transformative strategy.

Harley-Davidson's financial report card shows several areas of concern, all of which bode badly for the stock's prospects.

The company's debt-to-equity ratio of 2.6 is nearly double that of the industry average of 1.5. With operating and free cash flow drying up compared with last year, Harley-Davidson isn't in a favorable position to repay debt or take on new debt, if needed.

Harley-Davidson's historical performance, too, has been disappointing. At 2.4%, its three-year average revenue growth is far below the industry average of 8.7%.

In addition, analysts aren't particularly bullish on Harley-Davidson's stock. Analysts expect the company to increase earnings at 9.77% annually for the next five years, significantly underperforming the industry's 12.26% rate.

The median 12-month analyst price target for the stock is $50.50. But the 7.9% increase from current levels of $46.78 just doesn't seem worth the risk.

The final caveat is particularly for income investors: Don't be fooled by Harley-Davidson's 2.9% dividend yield and comfortable payout ratio of 33.58%. With Harley-Davidson's long-term growth itself in question, the first thing to take a hit will be dividend payments to finance revitalization efforts.

---

Harley-Davidson is a deeply distressed equity. To see a list of the absolute worst stocks to own right now, take a look at our latest survey of doomed equities. Inside, there is a full list of the market's most overvalued stocks, and investors can learn the process to keep avoiding them. Click here now for our updated report.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.