Lighter Inventory At Harley-Davidson May Make For A Smoother Ride For Sales

UBS sees downside risk to Harley-Davidson Inc HOG's shipment guidance while it reiterated its Neutral rating, saying that lighter inventory could result in a "smoother ride" for the company. Harley-Davidson wants US dealer inventory flat at year end. The brokerage said if HOG needs to achieve flat inventory, then the 2016 shipment forecast should have been flat to down 2 percent versus HOG's current shipment guidance of -1 percent to +1 percent. "The math suggests that 2H US retail sales would have to grow mid-single digit rate, after 1H declines. International mix most likely won't be enough to absorb the excess production," analyst Robin Farley wrote in a note. As a result, Farley cut his estimate for FY'16 shipments to down 0.7 percent YOY from up 0.4 percent YOY. The analyst also slashed his FY'16 EPS view to $3.79 from $3.87) and '17 EPS forecast to $4.08 from $4.17. Meanwhile, the analyst noted that the dealer sentiment clearly indicates too many model year' 16s in the channel. Hence, they expect HOG to unveil some financing incentives (not discounts) to clear that inventory. "One way to reduce inventory, if you can't increase retail sales rate, is to reduce the number of bikes in the line-up, and HOG did just that," Farley said. Farley also trimmed the price target by $1 to $54, based on a P/E multiple of 14x '17 EPS, discounted back to today. At the time of writing, shares of Harley-Davidson were up about 1 percent to $51.38.