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S&P Raises Harley-Davidson's Credit Rating

Zacks Equity Research

On Friday, Harley-Davidson Inc.’s (HOG) credit rating was upped to ‘A-’ from ‘BBB+’ by Standard & Poor’s (S&P) Ratings Services. Thus, the rating agency has assigned a stable outlook for the company.

The revision in Harley-Davidson’s rating is based on the company’s solid second quarter performance together with the company’s recovery from the impact of recession. In addition, Harley-Davidson emphasizes on boosting manufacturing efficiency and selling its higher priced motorcycles.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining credit worthiness in the market.

Harley-Davidson posted a 13.1% rise in earnings to $1.21 per share in the second quarter of 2013 from $1.07 in the same quarter of prior year. Earnings surpassed the Zacks Consensus Estimate by 4 cents. Net income increased 9.9% to $271.7 million from $247.3 million a year ago.

Consolidated revenues improved 3.5% to $1.79 billion, exceeding the Zacks Consensus Estimate of $1.63 billion. The increase in sales and earnings during the quarter were attributable to higher motorcycle shipments and continued improvement in operating efficiencies.

For 2013, Harley-Davidson reiterated its guidance of 259,000 to 264,000 motorcycles for shipment to dealers and distributors worldwide. For the third quarter of 2013, the company expects to ship 51,000 to 56,000 motorcycles compared with 52,793 motorcycles shipped a year ago.

Harley-Davidson focuses on selling its bigger, premium-priced motorcycles. However, we are concerned about the aging customer base of the company. The company is unable to attract younger generations, who are driven toward smaller and cheaper bikes like those made by Japanese manufacturers Honda Motor Co., Ltd. (HMC), Suzuki and Yamaha. Harley-Davidson offers an expensive product range, which attracts only premium consumers. The problem has become more pronounced amid the current economic environment with low consumer purchasing power.

Nevertheless, Harley-Davidson commands roughly 50% share of the U.S. market, providing scale advantages over most competitors. Furthermore, the company maintains an extremely strong franchise.

Currently, Harley-Davidson retains a Zacks Rank #3 (Hold). In the same industry, Ford Motor Co. (F) and Tesla Motors, Inc. (TSLA), each carrying a Zacks Rank #2 (Buy), are worth a look at the moment.

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