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Why Harley-Davidson's stock pulled a wheelie

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Harley-Davidson (HOG) may be riding through a sluggish motorcycle market these days, but as far as Wall Street is concerned the road ahead looks open and inviting.

The iconic American motorcycle maker reported better-than-expected quarterly results on Tuesday, and in response investors revved up the Milwaukee-based company’s stock by 9 percent, or $4.49, to $54.19. They were heartened by Harley’s plans to streamline production and reduce costs.

Even so, those earnings were hardly “born to be wild.” Net income slumped 18.7 percent to $114.1 million, or 64 cents per share, as revenue fell 3.2 percent to $1.27 billion. Global shipments of bikes plunged more than 9 percent to 48,611 as weakness in the U.S. market outweighed strength overseas.     

Unlike its rivals, Harley-Davidson has refused to discount its bike prices even as competition has intensified in recent years, a decision that analysts such as Jaime Katz of Morningstar argue has helped protect the integrity of Harley’s brand.  

Harley-Davidsons hit the road in China

“Last year was sort of an anomaly because they were competing against the Japanese manufacturers that were able to sell at extremely competitive prices because of the [low] valuation of the yen,” said Katz, who believes Harley’s shares are fairly valued. “If you start discounting, then people expect discounted models. Everybody waits for it, and nobody pays up.”

Harley isn’t the only motorcycle maker that’s struggling. According to the Motorcycle Industry Council, registrations slumped about 6 percent to 279,013 for the nine months ended Sept. 30. 

But the company did make progress in the quarter. Thanks to price increases, among other things, Harley raised its average revenue per unit by $1,035 during the period on a year-over-year basis. 

And customers have responded positively to Harley’s introduction earlier this year of the Milwaukee Eight Engine, which offers riders more power, comfort and control. As a result, shipments of touring bikes, which use the new engine, rose 6.8 points, the only type of Harley motorcycle to show a gain.

VP candidate Mike Pence takes a spin on a Harley

The wind, however, isn’t at Harley’s back quite yet. Fourth-quarter shipments are expected to be between 44,200 and 49,200 versus 48,149 a year ago. The company forecasts 2016 shipments of between 264,000 and 269,000 motorcycles, which would fall in a range from a 1 percent decrease to a 1 percent increase over 2015. 

Harley also announced a cost-cutting plan that includes eliminating 200 jobs, roughly 3 percent of its overall staff of 6,000.

Polaris Industries’ (PII) Indian Motorcycles, a brand that returned to the market in 2013 after a multi-decade absence, also looms as a long-term threat. However, Indian’s sales of about $250 million annually are dwarfed by Harley, whose revenue is expected to top $5 billion this year. Harley’s share of the larger bike market also is a commanding 52 percent.

Katz said Indian’s sales figure isn’t “negligible, but it’s not as scary as it could be.”

On a positive note, Harley reported that it trained more than 52,000 people in the U.S. through its Riding Academy programs that are designed to bring new customers into its showrooms. And it’s planning to add 16 new dealerships in the fourth quarter, in addition to the 20 it has opened so far this year.

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