On January 9, we maintained our Neutral recommendation on Harley Davidson Inc. ( HOG - Analyst Report ) , despite its lower earnings in 2012 third quarter, based on its commanding market share in the U.S and anticipation of increased shipment volume.

Why Maintained?

Harley-Davidson posted a 24.4% fall in earnings to 59 cents per share in the third quarter of 2012 from 78 cents a year ago, due to lower motorcycle shipments during the launch of an ERP production system at the assembly plant in York. However, earnings exceeded the Zacks Consensus Estimate by a penny.

Consolidated revenues fell 10.5% year over year to $1.3 billion, driven by lower shipments. Nevertheless, it was higher than the Zacks Consensus Estimate of $1.1 billion.

Following the release of the third quarter results, the Zacks Consensus Estimate for both 2012 and 2013 remained flat at $2.73 and $3.37 per share, respectively. As a result, the company now has a Zacks Rank #3 (Hold).

Harley-Davidson 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 the U.S., of which 55% exclusively market its products. It has a network of 1,468 dealers spread across the world.

The company increased its 2012 shipment guidance to 245,000 to 250,000 motorcycles, which is 5% to 7% higher than 2011. The increase depicts strong demand for the company’s product.

However, Harley-Davidson 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.

Other Stocks to Look For

Both General Motors Company ( GM - Analyst Report ) and Tesla Motors ( TSLA - Snapshot Report ) are performing well in the same industry, where Harley-Davidson operates. Both are Zacks Rank #2 (Buy) stocks.