Morningstar's take of HOG after the rough last quarter

Read the article below. I hope that the stock falls into the low 30's so I can add to my position. My wife also holds HOG in her RRSP.

Harley-Davidson's HOG fourth-quarter results reflect the reality of souring consumer discretionary spending--a trend that has been echoed across the domestic economy. We are making some adjustments to our model, but the changes won't materially affect our fair value estimate.

Total revenue declined 8% during the quarter--a result that was generally expected since Harley temporarily shut down its assembly line to reduce pipeline inventories. Domestic shipments were weak, down 20%, while international shipments showed continued strength, up more than 20%. With production cuts, Harley's profit margins are slipping due to fixed cost deleveraging. In addition, the firm is stepping up its sales and marketing efforts to bring in new Harley enthusiasts, both domestically and internationally. As a result, operating income excluding financial services declined 26% in the quarter. For 2008, management will keep production constrained, manufacturing fewer motorcycles than dealers are expected to sell.

Given turmoil in the financing markets, there have been growing questions about the health of Harley's financial services group. By all indications, the group continues to have access to the commercial paper market; however, management expects that gains on securitization transactions will be lower going forward. Harley's financial services group recently issued $400 million in medium-term notes to maintain flexibility but expects to continue utilizing the securitization market as its main vehicle. Losses on its retained portfolio of loans have ticked up, but are still below quarterly loss provisions. Plus, management has tightened its loan-to-value ratios, while performing additional performance and risk management diligence to sustain its credibility in the debt markets. Moreover, we value the financing segment at 2 times 2006 book value, which is a relatively conservative figure as it essentially excludes any of the gains that were made during 2007. Barring a complete meltdown of the economy, we think Harley has sufficient provisions to handle an uptick in credit losses.

During the year, Harley managed to increase both its operating and free cash flow. As a result, the firm increased its dividend payout 22% year over year and repurchased over $1 billion worth of shares. Harley's management expects to continue buying back shares throughout 2008, and with the stock currently yielding about 3%, shareholders are essentially getting paid to wait for the macroeconomic environment to improve.

Our long-term projections for the company's sales growth remain on the conservative side, below inflation over our 10-year discrete forecast period. We continue to think that the firm's strong cash-flow generation and brand strength make it a company worth sticking with over the long haul.