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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 - Analyst Report) are performing well in the same industry, where Harley-Davidson operates. Both are Zacks Rank #2 (Buy) stocks.

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