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Today, we’re opening a new bearish trade on Harley Davidson (NYSE:HOG) following the company’s announcement that it would be moving production overseas to avoid EU tariffs. Clearly, HOG’s management expects the “tariff war” to persist and are making long-term, defensive changes. Moving production will be very expensive even if shifted towards existing facilities. This is a risky announcement and one that we think will lead to much lower prices in the short term.
HOG has two problems to deal with in the current trade environment:
- The U.S. has levied a tariff that HOG must pay on imported steel and aluminum. Even shifting to available domestic sources means the cost of production has increased.
- Reciprocal tariffs from the EU, China and others are expected to increase the cost of shipping vehicles overseas. This reduces HOG’s competitiveness internationally and makes the motorcycles more expensive domestically.
Although this announcement could be seen as a way to pressure lawmakers and President Trump to ease back the throttle on protectionism, the dramatic announcement is unlikely to be a complete bluff. Either way, the company has increased uncertainty at a time when fuel costs are already rising and international markets are weakening.
HOG dropped on the announcement on Monday and is heading towards short-term support near $40 per share. If conditions worsen for HOG, longer-term support near $36 per share is a more likely target. We like the bearish play at this level, but recommend remaining flexible if the stock starts to consolidate in the $40 range. Traders may want to exit early if news from Washington D.C. puts the market a little more at ease this week.
‘Buy to open’ the HOG July 20th $42 Put (HOG180720P00042000) for a maximum price of $1.50.
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