Trade Update HOG: Closing July Put Spread for a Loss, But Covered With Yesterday’s Aug Put Spread

by Dan July 11, 2012 9:50 am • Commentary

Trade Update July 11th, 2012: HOG is down 3% today on the following comments from Citi:

July 11 (Bloomberg) — Harley-Davidson sales growth slowed
to increase of low single digits in June vs. up 7%-9% in May, up
low single digits in April, Citi analyst Gregory Badishkanian
said in note yday, citing dealer checks.
• Tracking 4%-5% US retail sales growth in 2Q vs. 26% growth in 1Q
• Negative impact may result from warmer winter weather from 1Q pulling demand forward from 2Q
• Retail inventory at “comfortable” level
• Citi rates buy, PT $61

I am going to close the July put spread that I bought late last month for a loss, but the Aug Put Spread that I bought yesterday will cover the loss and position me for the Q2 earnings even on Aug 1st.  

ACTION: HOG ($45.60) Sold the July 44/40 Put Spread at .43 for a .42 loss.

I am long the HOG Aug 45/40 Put Spread for .95 that I bought yesterday.  Now worth about 1.45 with the stock $45.60.


Original Post June 27th, 2012: 

The weakness today in consumer discretionary names like UA, RL, TIF, CMG, PNRA, on what appears to be a fairly broad rally today, got me scanning for other stocks that I think could be vulnerable in a market where investors are looking to protect gains in winners, are worried about a deteriorating global macro environment hurting near term visibility, which would cause what appears to be a move out of cyclicals into more defensive sectors such as utilities.

HOG caught my eye purely on a technical basis as just this week broken its up trend channel that has been intact since last fall, sitting on huge support and appears to be a textbook head and shoulders top, with current level of about $45 the neckline.

Year to Date HOG chart from Bloomberg


Today’s weakness is the result of  the company’s commentary at an analyst meeting yesterday that might have raised more questions than it answered as they did not comment on the current trends or business outlook.  Here was a quick rundown from Bloomberg today siting a research note from UBS:

June 26 (Bloomberg) — Harley-Davidson noted at yday analyst meeting 2Q gross margin may be a little below Q1 35.9% vs. its comments of “pretty much in line” with 1Q from its April call, UBS analyst Robin Farley writes in note.
• Reduces 2Q gross margin est. to 35.5% from 36.9%, 2012 gross margin to 34.8% from 35.4% (vs HOG’s yr forecast 34.75%-35.75%) on stronger dollar
• Reduces 2012 EPS est. to $2.77 vs prior $2.91, Bloomberg consensus est. $2.80; lowers 2013 to $3.31 vs prior $3.47, consensus $3.57
• HOG said it’s likely to further reduce inventory in dealer channel in ’13, due to expansion of flexible mfg to KC plant in 2014, according to Farley
• Further dealer destocking in ’13 may also be due to HOG unintentionally overproducing bikes in 4Q11, 1Q12 in anticipation of 2Q ERP implementation that fell through
• Keeps neutral, PT $49 down from $50

MY VIEW: I Don’t have any particular insight into HOG’s fundamentals, but it seems that the street is fairly positive on the name with 14 Buys, 4 Holds and only 1 Sell.  The company is fairly levered for a company it’s size, it has about $5.5b in net debt with a market cap of about $10b (they have $1.4Bil in cash).  It appears to me that if we were to head back into a period of uneasiness as it relates to indebtedness of nations, states, individuals and companies that Harley’s debt load could stick out like a sore thumb.  That is by no means a great reason to short the equity at a time where things seem ok, but the company clearly sounded a bit more cautious yesterday and any continued caution on their expected earnings call July 19th, could cause a technical breakdown in the stock.


MY TRADE: I am going to start to nibble at a July Put Spread in front of earnings and in front of what I feel will be a near term test of 1250 in the SPX. As I said above I have no strong belief that the company will miss current earnings, but any continuation of poor visibility and this stock could be trading below its current above market multiple.


TRADE: HOG ($45) Bought the July 44/40 Put Spread for .85
  • Bought 1 July 44 Put for 1.28
  • Sold 1 July 40 Put at .43


Break-Even on July Expiration:

Profits of up to 3.15 btwn 43.15 and 40.00, max gain of 3.15 below 40.

Losses of up to .85 btwn 43.15 and 44, with max loss of .85 at 44 or higher.

Trade Rationale: Implied vol aint exactly cheap, which is why I am spreading it (at the money implied vol in July is about 40 vs the 30 day realized vol of about 35 and the 90 day realized vol of about 30).  If we see a continuation OUT of high growth names that have worked ytd (HOG up 15%), HOG could be a source of funds for some investors.