In April, I suggested in an article that higher fuel prices, a slowing economy and a generally lackluster economic environment might cause Harley Davidson's (NYSE: HOG) future financial results to drop into mediocre territory.

Well, it looks like I may be on to something with this one, because this past week the well-known motorcycle manufacturer released its second quarter earnings, and they weren't so hot.

While the company managed to beat its consensus estimate by a penny, earning $1.14 per share, its total sales came in at $1.62 billion, just shy of the $1.64 billion that Wall Street had been expecting.

This isn't a huge shortfall and it certainly doesn't foreshadow any impending doom, but management's comments regarding the future do cause me to believe that things may go downhill from here.

In addition to the earnings release, Harley's chief executive, Jim Ziemer, made a comment that the company "will continue to closely monitor the retail environment and regularly assess (our) planned wholesale shipments throughout the remainder of 2007."

What does this mean?
This could mean that there is a chance that a slackening demand for bikes in the U.S. will cause the company to scale back shipments, which could impact profits. In other words, this sounds pretty pessimistic, and is seems like management may be playing things by ear.

For what its worth, it looks like I may not be the only one who's skeptical. In fact, over the last week, the average earnings estimate for the full year 2007 has gone down from $4.14 per share to $4.12 per share, while the average estimate for 2008 has been reduced from $4.63 per share to $4.54 per share.

Another comment that management made that gives me pause is that for the 2008-2009 time frame, it expects the company to generate 11-17% earnings growth. That sounds good, but because outlook for the domestic economy is basically a question mark, how can the company predict what will happen in 2009 with any confidence?

Frankly, I think that the company is setting itself up to disappoint investors. (To learn more, read Get Tough On Management Puff.)

Other Bones to Pick
Another thing that bothers me a bit is that senior execs continue to bail on the stock. In fact, insiders sold more than 65,000 shares over the last six months alone. And while the lion's share of that was option related, if the outlook was really as bright as management suggests, those folks might would exercised their options and then hung onto the stock. (For more on insiders, read Uncovering Insider Trading.)

Also take a look at Harley's sales figures. In spite of a 13.7% jump in European retail motorcycle sales, total bike sales were actually down 1.2% worldwide in the quarter, thanks to a 5.5% drop in domestic cycle sales. So what happens if the domestic economy really slows down? How many people are going to spend $25,000 on a new bike? Frankly, I think that Harley Davidson's total sales could take a major nosedive if that were to happen, although nobody seems to be talking about this risk.

Next, think about the timing. While the third quarter is usually a decent earnings period for the company, the fourth quarter and the first quarter are slow because of seasonal factors. The point is, why buy the stock now, ahead of what are some of its historically slower quarters, especially with little visibility into 2008 and 2009 earnings?

The Bright Side
Despite the downside, there are several things that lead me to believe that the shares could trade higher over the longer term, in spite of what I perceive as sizable near-term risks.

First, Harley remains a household name. Although competing manufacturers have tried to copy Harley's look and style, they've fallen short. Also, the company continues to repurchase shares. In fact, during Q2 it repurchased some 6.7 million shares at a cost of $429.9 million. This suggests that the board is optimistic about the company's future.

Also, in spite of its difficulties in the domestic markets, the company continues to kick off solid operating cash flow. Finally, don't forget that the stock still sports a small dividend, with a current yield of about 1.7%.

The Bottom Line
Over the long haul, I think that Harley will be a winner, but its second quarter results and management's associated comments lead me to believe that the near-term outlook will be sketchy at best. For this reason, I'd steer clear of the stock for now.

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