Harley-Davidson banal could be headed for a austere wipeout this advancing week.
J.P. Morgan has brash audience to buy arresting put options on Harley’s banal (ticker: HOG) in apprehension that the motorcycle maker’s balance report, due to be appear Tuesday morning, could account shares to abatement by 37% or more.
The bearish angle reflects apropos that the bread-and-butter fallout of Covid-19—the almanac unemployment and retail weakness—could actualize agitation for both the company’s sales and its costs for customers.
At a time back anniversary day seems to accompany account of added accumulated layoffs and bread-and-butter difficulties, affairs an big-ticket motorcycle apparently doesn’t rank aerial on best people’s actual arcade lists. A Harley-Davidson 2020 CVO Street Glide, for example, costs $40,539.
In accession to an accepted abridgement in approaching demand, Harley may accept agitation with some absolute barter who bought and financed their acquirement through the company, Shawn Quigg, a derivatives architect at J.P. Morgan, told audience in a contempo note. Harley-Davidson Financial Services, which allows consumers to administer for acclaim online, represents a big allotment of the company’s operating income.
Harley-Davidson didn’t acknowledge to requests for comment. The Street expects the aggregation to address balance of 58 cents per allotment for the aboriginal quarter, compared with 98 cents for the year-ago quarter.
According to Quigg, the financial-services business represents about 48% of Harley’s operating income, alike admitting it accounts for alone 15% of absolute revenue. Of the absolute receivables, he wrote, about 18% accept acclaim array beneath 640, which is advised to be subprime.
Manufacturers are incentivized to advertise to barter back bread-and-butter trends are favorable and acclaim stresses are low, the architect noted. “However, the actual allurement to advertise units may appear at the amount of the longer-term risks, which can actualize a mismatch, accretion the anticipation of tail-events in times of acute acclaim stress, such as that apparent with COVID-19,” Quigg wrote.
The bread-and-butter troubles created by the virus, and the cogent accession that costs makes to the company’s operating income, could drive investors to amend how shares are valued. Quigg argued that “significant operating risks…support a case for HOG to barter at or beneath its actual book amount per allotment ($11.34).”
To monetize his thesis, he appropriate audience buy Harley-Davidson’s May $17 puts that amount $1.40 back the banal was at $18.28. Should the banal barter at its $11.34 actual book amount at expiration, the put is account $5.66. The barter will abort if the banal is aloft the put bang amount at expiration.
During the accomplished 52 weeks, Harley’s banal has ranged from $14.31 to $40.89. Shares are bottomward about 50% this year.
In accession to the balance report, Harley implemented new accounting rules in January that crave a front-load acceptance on acclaim losses on loans and added costs assets. This could accompany greater abrogating absorption to the company’s costs operation, Quigg wrote.
Investors are acceptable acquainted that Ally Financial (ALLY), one of the nation’s better prime auto lenders, appear that as of April 16, 25% of its auto-loan barter requested acquittal deferral—70% of whom accept never been delinquent. “ALLY carries a college FICO audience than HOG,” Quigg noted.
The adumbrated animation of Harley’s options that expire in one ages and are 5% beneath the stock’s amount are not priced with a cogent abhorrence exceptional about to the S&P 500 index—or those of General Motors (GM) and Ford Motor (F). Quigg wrote.
Harley-Davidson is priced in the options bazaar as if the banal will move about 10%, up or down, in acknowledgment to earnings, compared with an boilerplate move of 4.7%, up or down, over the accomplished three years.
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