An Harley-Davidson (NYSE: HOG) earnings beat in 1Q did not seem to be enough to calm investor concerns over weak U.S. retail sales. HOG's near-term multiple and share price will largely be dictated by 3 factors outside of the co's control: FX, housing and oil, Morgan Stanley analyst Adam Joneas notes. No change to Overweight rating or $54 PT.

Although 1Q earnings beat expectations, the recent share performance suggests investors remain skeptical. Weak U.S. retail sales (-0.5% y/y in 1Q) and higher credit losses and delinquencies impacting HDFS op. income overshadowed better-than-expected operating margins, strong international sales and shipments which exceeded the top end of management's target range.

The current multiple (11.7x P/E vs. the historical trend of 16x since 2010) largely reflects key concerns around lackluster domestic demand and share erosion. Management appears to be addressing these issues through higher marketing and product development spending. The near-term multiple (and share price) of Harley will ultimately be dictated by three factors: FX, housing and oil:

(1) FX: The recent reversal in the dollar is a potential bright spot for HOG assuming the current trend continues.A dovish Fed and large inflows into emerging markets have weakened the USD (trade-weighted) by more than 3% since its peak in late January. Japan, Canada and Latin America each account for ~4% of HOG's retail sales and EMEA accounts for more than 16% of sales. In 2015, the collective exposure to these regions resulted in a currency headwind of $120mm...mgmt. expects a further $50mm hit to gross profit in 2016. Further easing of the dollar can potentially reaccelerate margins sooner than the market expects.

(2) Housing: We have long argued that it is difficult to de-couple HOG from the recovery in US housing. Given the high median income of a HOG buyer (~$90k), housing may be one of the better barometers of the overall health of a potential customer. So far, housing starts appear to be tracking below Morgan Stanley's 2016 estimate of 1.3mm. March was especially tough as starts fell 8.8% to a five-month low of 1.089 million.

(3) Oil: HOG sales likely have disproportionate exposure to US states experiencing a slowdown in oil rig/fracking states. In recent earnings calls, management has called this out as a key contributor to softness in sales. In addition, weaker-than-expected HDFS earnings were partially attributed to higher credit losses and delinquencies in states like Texas (~8% of US motorcycle sales). A sustained recovery in energy prices that puts oil economies back on track could drive the near-term multiple, in our view.

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Shares of Harley-Davidson closed at $46.94 yesterday.