Harley-Davidson has had an impressive run over the past six months as its shares have beaten the S&P 500 by 7.5%. The stock now trades at $30.63, marking a 25.1% gain. This run-up might have investors contemplating their next move.

Is there a buying opportunity in Harley-Davidson, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Harley-Davidson Not Exciting?

We’re glad investors have benefited from the price increase, but we don't have much confidence in Harley-Davidson. Here are three reasons why HOG doesn't excite us and a stock we'd rather own.

1. Decline in Motorcycles Sold Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like Harley-Davidson, our preferred volume metric is motorcycles sold). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Harley-Davidson’s motorcycles sold came in at 35,837 in the latest quarter, and over the last two years, averaged 22.2% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Harley-Davidson might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.

2. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Harley-Davidson’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Harley-Davidson’s $7.10 billion of debt exceeds the $1.59 billion of cash on its balance sheet. Furthermore, its 19× net-debt-to-EBITDA ratio (based on its EBITDA of $285 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Harley-Davidson could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Harley-Davidson can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Harley-Davidson isn’t a terrible business, but it doesn’t pass our bar. With its shares beating the market recently, the stock trades at 10.8× forward P/E (or $30.63 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. Let us point you toward a top digital advertising platform riding the creator economy.

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