Economy Weighs On H-D

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Harley-Davidson is in for more bad news this year and is likely to face drag from a generally sluggish economy, a financial analyst predicted today.

The company is likely to reduce production this year to stabilize dealer inventories and avoid heavy discounting and promotional pricing, Wachovia Capital Markets Senior Analyst Timothy Conder wrote.

He maintained his "market perform" rating on H-D, which trades under the symbol HOG, but reduced his valuation range to $45 to $50, from a previous range of $51 to $54.

Part of the risk to the company is its financing business, HDFS, which Conder says accounts for half the powersports industry's financing.

Conder held onto his $3.77 earnings per share estimate for 2007, but dropped his 2008 estimate to $3.88 from $4.01. A 5.5% production decline (to 330,005 units) for 2007 and another 2% decline for 2008 are baked in. The 2008 estimate of 323,405 units is down slightly from a previous prediction of "flat."

He also expects the OEM's gross margins to contract by 65 basis points, based on "a leaner mix of higher end cruiser and touring shipments, and higher manufacturing overhead absorption."

Despite expectations for a couple of challenging years, Conder complimented H-D's management.

"We will continue to look for opportunities to again consider becoming more constructive as we admire Harley?s strong management (including their willingness to make difficult short-term decisions such as production cuts vs. ongoing financing promotions to preserve the integrity of the brand), unlevered operating company balance sheet, and solid mid-30% returns on equity, which continue to help support ongoing accretive share repurchases," he wrote.