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Harley-Davidson's on the Road to Profit Growth

Even with shipments down, management squeezes out margin gains.

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 Harley-Davidson (HOG) faces demographic headwinds, an uncertain global economic environment, and increasing competition, which could make for a choppy ride in the near term. Still, we think the motorcycle manufacturer is set to see decent profitability growth once consumers recover from the economic downswing and are willing to once again spend on big-ticket items. We believe the shares are currently about fairly valued, but given a wide enough margin of safety, we would be buyers as we start to see stability in the employment and overall economic picture.

We believe operational changes are key to improving profitability over the long term. Management has made great strides in creating a best-in-class manufacturing process. Its new lower cost structure provides additional flexibility, which allows Harley to adapt production to marketplace demand and outsource processes when it makes competitive sense to do so. The company's restructuring is expected to yield savings of $300 million annually--equivalent to 7% of the total expense base. Harley's transformation strategy also includes two brand-boosting goals: improving brand acceptance by extending customer outreach, and maintaining leadership in the cruising and touring segments by increasing loyalty through innovative products and services.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.