Analyst cut puts brakes to Harley's wild ride

UBS cut its profit estimates for the motorcycle maker for this year and next, taking the stock price down after an 18% rise so far in 2012.

By MSN Money Partner Jun 26, 2012 1:36PM
By Jonathan Berr

Shares of Harley-Davidson (HOG) are up about 18% this year, and Wall Street expects better times ahead for the motorcycle maker.

The average 52-week price target for the Milwaukee company is $57.46, more than 25% above where it currently trades. Shares of the iconic brand were down Tuesday, along with the broader market, despite bullish comments on CNBC by Harley CEO Keith Wandell. The stock was trading down 3.4% to $46.30 at midday Tuesday.

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Shares fell after UBS analysts significantly cut profit estimates for 2012 and 2013. The analysts reduced 2012 targets to $2.77 a share from $2.91 a share, and cut 2013 targets to $3.31 from $3.47.

Perhaps the market is also still mulling a recent Citigroup report, which argued that sales had slowed "significantly" from the first quarter. Citigroup, however, maintained its "buy" rating on the stock. Harley-Davidson expects to ship 245,000 to 250,000 motorcycles this year, including 79,000 to 84,000 in the second quarter.

Investors have many reasons to be revved up about Harley-Davidson, which has beaten Wall Street earnings forecasts for four straight quarters, in part because it has reduced manufacturing costs. For one thing, it was the market share leader among U.S. cycle riders in 2011 for the fourth straight year in a variety of demographics, including adults aged 18 to 34, women, African-Americans and Latinos. Last year, more than one-third of U.S. customers were new to the brand. The company also is expected to benefit from its expansion into emerging markets. Moreover, the company's new Seventy-Two and Softail Slim models have been well received by motorcycle enthusiasts.

Wall Street expects Harley-Davidson revenue to rise 8.6% this year and 10.8% in 2013.  The stock also looks cheap, trading at a multiple of 18.68, well under its five-year high of 83.32, according to Reuters. Earnings are expected to jump about 14% for the next five years, higher than the average of the S&P 500 of about 10.5%. 

But there may be some bumps in the road ahead. Consumer sentiment in June declined to a five-month low, according to the Conference Board. That number was surprising given the decline in gasoline prices. The iconic motorcycles aren't cheap either.

Harley-Davidson, however, isn't a typical example of consumer discretionary spending. It is a brand that has a following that can be fanatical. Even people who don't know where to kick-start a bike know Harleys.

Consider how Cycle World recently described a Harley model: "There is something special about being a survivor, like the Harley-Davidson Sportster has proven to be in its 55 years of existence," the website says. "The XL is like a well-weathered and wise old coot who has seen it all along the way. But this Forty-Eight version just could be the coolest of the lot."

A Harley is something that people don't just aspire to own. They lust after it. Such devotion will continue to propel the stock for the foreseeable future.

Jonathan Berr would endanger himself and others on any motorcycle. Nonetheless, he may add Harley to his portfolio. Follow him on Twitter@jdberr.

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