Harley-Davidson is “overweight,” according to Morgan Stanley analyst Adam Jonas in a client note yesterday.
In Morgan Stanley’s parlance, the Harley-Davidson overweight rating carries a positive connotation, and an old Los Angeles Times article explains the meaning of over, under, and equal-weight stocks as denoted by the numbers whizzes at the brokerage:
“Under Morgan’s new system, an overweight rating means the analyst believes the stock will produce a greater total return (appreciation plus any dividend income) than the average return expected of others covered in its industry over the next 12 to 18 months.”
Morgan Stanley’s Harley-Davidson “overweight” rating carries some significance for the stock’s rating, however, and the brokerage explains the meaning of such ratings and their relation to “buy,” “sell,” or “hold” ratings:
“Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings … To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.”
In the note, Jones explains his Harley-Davidson “overweight” rating, saying that the company (indexed as “HOG”) has a bright outlook in coming quarters:
“Morgan Stanley’s bullish view on US housing can translate into a high single-digit volume CAGR for HOG. Competitive, flexible manufacturing footprint. HOG’s $0.5bn restructuring since 2009 has seen a 50% cut in the hourly workforce and implementation of ERP and flexible manufacturing where 30% of the workers can be seasonal.”
“HOG has generated significant free cash flow to equity holders for 18 of the past 20 years and we expect $1bn of FCF on average through 2017.”
Jones added that “navigating a Softail Fat Boy through Beijing traffic (and pollution) is very different from driving a comfortable, climate controlled BMW 7-Series,” opining that gains in China may be a factor in Harley-Davidson’s overweight rating, as they can be long to come.