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Harley-Davidson (NYSE:HOG) is scheduled to announce its Q4 earnings on January 29. Besides selling the iconic motorcycles, the company also offers its brand merchandise and provides wholesale/retail financing and insurance programs to dealers and customers. The U.S. accounts for about two-thirds of the total motorcycle sales.

The last quarter has been pretty good for the company, with the stock gaining more than 20% from a low of $41 back in October. The company is nearing the end of a comprehensive five-year long restructuring process, and will hope to see substantial cost savings from its efforts going forward. The restructuring process, which began in 2009, is expected to reduce manufacturing costs, increase efficiency, facilitate far more flexibility in labor requirements, and will also help reduce product development time by 30% that will enable the company to launch new models faster.

The program is expected to create annual savings in the range of $315-$335 million upon completion. Already, we see an improvement in the profitability, with gross margins expanding by 100 basis points to 34.7% in the third quarter. Management expects full year gross margins in the range of 34.75%-35.75%.


Home And Away

In the U.S., Harley’s core customer base consists of 40-49 year old males, a segment of the population that is shrinking. As a result, the company has now begun to focus on a number of new segments, including young adults, ethnic minorities and females. Furthermore, new motorcycles will be coming in by 2015. These upcoming models have been in the pipeline since 2009-10, and could help Harley-Davidson maintain or even extend its market share. Harley’s American sales were up 6% to almost 136,000 units in the first three quarters of 2012.

Internationally, Harley is targeting large scale expansion in emerging markets such as Brazil and India, and these are the only two countries where the company has set up an assembly plant outside the U.S. Its motorcycles segment has performed exceptionally well in Latin America and Asia in the last few years. In the first nine months of 2012, Asia and Latin America combined contributed 12% to its total sales, compared to 10.4% in the year prior.

Harley will introduce a new motorcycle made exclusively for India within the next two years to take on its Japanese and Korean rivals. The motorcycle will be built locally in the country and will target entry-level, premium motorcycle buyers. Currently, the lowest priced model that Harley offers costs upwards of $10,000. The new motorcycle will start from $6,000 to compete against the likes of the Kawasaki Ninja 250R and Hyosung GT250R.

Europe is expected to remain sluggish due to the weak macro-economic growth. The region accounts for about 15% to the company's total sales, but its percentage contribution has declined for awhile now. Harley’s European sales were down 5% through September, and unless we see any improvement in the macro-economic indicators, a turnaround in Harley’s European performance looks unlikely in the near term.

We have a $57 price estimate for Harley-Davidson, which is about 10% above the current market price.

See our full analysis for Harley-Davidson

Disclosure: No positions.

Source: Can Harley-Davidson's Earnings Deliver Growth And Fatter Margins?