Earnings Preview: Harley-Davidson Inc.

| About: Harley-Davidson, Inc. (HOG)

Harley-Davidson Inc. (NYSE:HOG) announced that it will release its first quarter results for 2010 before the market opens on April 20, 2010. The motorcycle maker had disappointed in the fourth quarter of 2009 by reporting a loss of $147.2 million or 63 cents per share compared to an income of $91.9 million or 40 cents in the comparable period a year ago.

The loss is also pronounced compared to the Zacks Consensus Estimate of a loss of 34 cents per share. This was driven by lower shipments due to the difficult economy and the restructuring actions that resulted in huge charges of $167.1 million.

In the upcoming quarter, the Zacks Consensus Estimate for Harley is a profit of 27 cents per share. This is almost half of what the company earned (50 cents per share) in the first quarter of 2009.

We believe an aging customer base, poor performance in the Financial Services segment, higher restructuring expenses and a turbulent economy will continue to adversely affect Harley in the upcoming quarter. This led to a significantly lower Zacks Consensus Estimate for the upcoming quarter than the reported EPS a year ago.

Harley-Davidson has not been able to attract the younger generation, who are driven toward smaller and cheaper bikes such as those made by Japanese manufacturers Honda Motor (NYSE:HMC), Suzuki and Yamaha. As a result, its customer base is getting older.

Further, the company’s finance arm, Harley-Davidson Financial Services (HDFS), has continued to report operating losses since the fourth quarter of 2008. In the fourth quarter, the segment recorded an operating loss of $7.1 million.

Higher restructuring expenses are another concern for Harley. In 2009, the company incurred restructuring expenses of $224 million. The company expects restructuring charges of $430 million to $460 million till 2012, including $175 million to $195 million in 2010.

Due to the turbulent economy, Harley expects its shipments to drop 24%–30% to 52,000 to 57,000 motorcycles in the first quarter of 2010.

Estimate Revisions Trend

Over the last 30 days as well as 7 days, none of the analysts have revised their estimates either upward or downward for the first quarter of 2010. The trend is same for full year 2010, for which the Zacks Consensus Estimate is $1.08, an improvement from 30 cents in 2009.

With respect to earnings surprise, the company has beaten the Zacks Consensus Estimate thrice in the trailing four quarters. This is reflected in the average earnings surprise of 5.55%, implying that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

However, the upside potential for the first quarter of 2010 and full year 2010, essentially a proxy for future earnings surprises, is nil.

The absence of any upward or downward revision of the estimate and a nil upside potential for the stock indicate a Zacks Rank #3 for the stock, which translates into a short-term “Hold” rating.

However, considering the difficulty of the company with an aging customer base, the loss-making HDFS, restructuring costs and the weak economy, we continue with our long-term recommendation of “Underperform” for the stock.