Nobody knows what the "new normal" for this economy is going to look like. Poor employment and wage growth, and nervous banks are keeping a limit on big-ticket consumer spending, but it seems reasonable to assume that the average consumer's taste for leisure has not vanished for good. The trouble, though, is that some stocks like Harley-Davidson (NYSE:HOG) seem to be pricing in a quicker return to normal than the economy seems capable of delivering. (To learn more about the effect earnings will have on stock prices, check out Earnings: Quality Means Everything.)

TUTORIAL: Earnings Quality

A Strong Rebound in the Second Quarter
Certainly Harley-Davidson showed some signs of life in this latest quarter. Revenue jumped 18% as the company shipped 13% more bikes and realized almost 7% better pricing. This growth was underpinned by better than 7% growth in domestic sales, while international sales and shipments were relatively softer.

Profits were also higher this time around. Gross margin was flat with last year, while operating income (excluding financing operations) rose 39%. That is a pretty solid validation for the company's restructuring efforts, though it is also worth noting that ad spending in this environment would likely be unproductive anyway.

Pulling Production Forward?
Given the discrepancy between underlying retail sales and Harley-Davidson's shipments, it's pretty clear that dealer replenishment was a big story this quarter. That's all well and good to a point - higher sales are better than lower sales - but investors should be wary of the false dawn. Consumer balance sheets are still not strong, the employment and wage environment is challenging at best, and consumer lenders like General Electric (NYSE:GE), KeyCorp (NYSE:KEY), and Nationwide don't seem tremendously eager to repeat some of their loose underwriting practices of the pre-recession days.

The risk, then, is that dealers are buying more bikes than they can sell and that they will have inventory sitting around in their showrooms. It doesn't likely change the total production or shipment outlook of Harley-Davidson on a multi-year basis, but it does alter the timing and investors may be making a mistake projecting these kinds of results forward. (If you are making a big purchase in the near future and need help determining the type of loan to use, read Different Needs, Different Loans.)

Still a Strong Brand
On the plus side, Harley-Davidson is the major name in heavyweight motorcycles. HOG holds over half the U.S. market for these bikes and Honda (NYSE:HMC) and BMW (Nasdaq:BAMXY.PK) just don't have the same sort of image or hold on the imagination. Said differently, not too many people in this country seem to dream about the day they can finally own their own Honda. Much as it may sound like anathema, that should offer some downside protection if the economy rolls over again - if Harley really got into trouble, a buyer would almost surely emerge.

Trading in the Big Tickets
Harley-Davidson isn't alone in facing a challenging consumer spending environment. RV companies like Thor (NYSE:THO) and Winnebago (NYSE:WGO) are working through their own recoveries, as are other recreational vehicle makers like Polaris (NYSE: PII) and privately-owned Bombardier Recreational Products. Likewise for vehicle dealers like Marinemax (NYSE:HZO). The consumer demand for big-ticket leisure items may not have vanished, but the accommodating environment has.

In the meantime, customers may be trading down for cheaper pleasures like cruises from Carnival (NYSE:CCL) and Royal Caribbean (NYSE:RCL) and resort stays at Vail Resorts (NYSE:MTN) or Great Wolf (Nasdaq:WOLF). Certainly it is no substitute for a Harley-Davidson (and used vehicles can fill some of that gap), but it is a more attainable luxury in the current environment.

The Bottom Line
Barring a big improvement in the consumer spending environment, Harley-Davidson shares look overheated. Even giving the company credit for its ongoing restructuring, today's stock price seems to demand revenue growth on the order of 10% a year for the next four or five years - quite a hurdle given this company's past sales growth performance. Harley-Davidson does have a great brand and is capable of producing solid returns on capital, but a little perspective is in order. The economy has certainly passed the worst of the recession, but a return to the halcyon free-spending days seems quite further away right now. (For more on earnings, see Everything Investors Need To Know About Earnings.)

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