Harley Downgraded to Neutral

We have downgraded our long-term recommendation on Harley Davidson Inc. ( HOG - Analyst Report ) to Neutral. The leading designer and manufacturer of heavyweight motorcycles has roughly 50% market share in U.S.

The company looks forward to increasing its shipments of motorcycles in the range of 245,000 to 250,000 units in 2012. However, the company faces difficulties owing to the aging customer base and expensive product range.

Harley-Davidson manufactures heavyweight customary, touring and cruiser motorcycles and markets them in North America, Europe, Asia-Pacific and Latin America. The company has a network of 706 dealers in the U.S., of which about 55% are exclusively marketing its products. It has 1,468 dealers spread across the world.

Harley- Davidson witnessed a 44% year over year jump in its profit (to $172 million) in the first quarter of 2012. The company’s earnings per share swelled 45% to 71 cents in the quarter from 51 cents recorded in the year ago quarter. The results surpassed the Zacks Consensus Estimate by 3 cents.

Total revenues boosted by 17% year over year to $1.4 billion. The increase in revenues and earnings was attributable to a rise in motorcycle production and related product sales due to improved macroeconomic conditions in the U.S.

Harley-Davidson has been successfully continuing its restructuring activities since 2009. The company had cumulative savings of $217 million from restructuring activity in 2011. Further, it expects to generate annual savings of $275 million–$295 million in 2012 and $315 million–$335 million starting 2014 after the completion of the restructuring activities.

However, Harley-Davidson faces challenges from its aging customer base. The young generation is more attracted towards smaller and cheaper bikes manufactured by Japanese manufacturers Honda Motor Co. ( HMC - Analyst Report ) , Suzuki and Yamaha. Even the company’s initiative to manufacture faster, smaller bikes by acquiring Buell and MV Agusta was not successful.

Expensive products are not so feasible for the younger generation, thus the customer base remains constricted only to the premium consumers. Lower purchasing power of the customers owing to the current economic conditions results in sluggish demand for Harley-Davidson’s products.

Harley-Davidson commands a dominant market share compared to its competitors. But one of its major rivals, Honda, has greater financial resources due to its diverse product line.

Our long-term recommendation is backed by a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.