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We are reiterating our Neutral recommendation on Harley Davidson Inc. (HOG - Analyst Report). The leading designer and manufacturer of heavyweight motorcycles continue to benefit from a commanding market share in the U.S. However, aging customer base and strong competition remain concerns for the company.

Harley, in the second quarter of 2012, reported a 32% surge in earnings to $1.07 per share from 81 cents in the year-ago quarter. The results also surpassed the Zacks Consensus Estimate by 2 cents. Profit escalated 30% to $247.3 million from $190.6 million in the corresponding quarter last year.

Total revenues (including Financial Services) rose 15% year over year to $1.7 billion in the quarter, exceeding the Zacks Consensus Estimate of $1.6 billion. The growth was driven by higher motorcycles and related products sales.

Harley enjoys a scale advantage over its peers as it commands a 50% market share in the U.S. It operates with 706 independent dealers in U.S., of which 55% exclusively marketing its products. It has a network of 1,468 dealers spread across the world.

Harley 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 after the completion of the restructuring activities in 2014.

The company increased its 2012 shipment guidance to 245,000 to 250,000 motorcycles from the prior estimate of 240,000 to 245,000 motorcycles. The increase depicts strong demand coupled with the company’s ability to produce additional motorcycles in the year.

However, Harley faces challenges from its aging customer base. The young generation is more attracted toward 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.

In addition, expensive products get limited to the premium consumers. Current economic condition also puts pressure on the purchasing power of the customers, resulting in sluggish demand for Harley’s products.

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

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