These Are Hard Times, Not End Times, for Harley-Davidson Inc.

A new kind of Pope-mobile: a 20131,585 cc Harley-DavidsonDyna Super Glide Custom, sold at auction for a heavenly sum, which was then donated to charity. Photo source: Bonhams.

There are a lot of reasons that a Harley-Davidson motorcycle autographed by Pope Francis sold at auction last year for over $329,000but one signed by former prelate Benedict XVI fetched just a twentieth of the price when it was auctioned off just a few weeks ago.

Not only was there a bit of mania surrounding the elevation of the popular Argentinean cardinal (his leather biker jacket sold for $78,000), but his signature was an actual autograph while Benedict's was screen-printed.

Yet the disparity in values also serves as a good metaphor for the change in fortunes for the bike maker, and though Harley doesn't need divine intervention to turn things around, investors might want to exhibit some saintly patience before diving in.

Grinding gears on growthLast month, Harley-Davidson posted fourth-quarter earnings that beat analyst expectations as per-share profits came in at $0.35, better than the $0.34 per share it recorded last year and $0.02 per share ahead of Wall Street estimates.

However, net income actually decreased year over year, falling 1% to $74.5 million as Harley's U.S. market (and market share) weakened despite higher sales internationally. Even though the Asia-Pacific region saw a better-than-14% gain in the fourth quarter, domestic sales, which account for two-thirds of Harley's business, fell 1.6% as it sold fewer than 27,000 new bikes in the quarter.

The bike maker has been reaching out to new demographics to bring in buyers and riders, but it looks like Harley is still losing more of its bread-and-butter core customers:the middle-aged white male who's boughtmore than nine times as many Hogs than he has of bikes from Harley-Davidson's nearest competitor.

A new kind of Hog enthusiastOver the past few years, the bike maker has sought to expand its target market to include blacks, Hispanics, and women, and while the success ofHarley's Street 500 and 750 bikes indicates the strategy is working, it's not nearly enough to offset the decline in sales from its core customers, andsales remain 22% below their 2006 peak.

Slowing sales may lead to a road race for the muscular motorcycle maker. Data source: Harley-Davidson annual SEC filings.

Introduced in late 2013 to compete against leading lightweight bike maker Honda Motors, Street sales drove double-digit gains in the bike maker's small cruiser segment, with the majority of initial purchases in the U.S. going to riders new to the Harley-Davidson brand. Sportster/Street division sales jumped 20% in the fourth quarter to $9.5 million and were up 13% for the full year.

The two runabout models are also popular in international markets where Harley has been paying particular attention to new sales growth, adding 136 new international dealers to its distribution network since 2009. In fact, the Street 750 was recently named India's Motorcycle of the Year,and Harley sales doubled in the country last year.

Harley-Davidson took it to the streets last year with its popular, liquid-cooled Dark Custom Street 750. Photo source: Harley-Davidson.

But because the domestic market is the ultimate key to Harley's success, the loss of momentum since bouncing back in 2011 from the devastating effect recession had on sales is taking a toll. As I noted earlier this month, sales and shipments are steadily declining, and it looks like Harley had to push out a few extra bikes to dealer lots in the fourth quarter just to achieve the reduced shipment goals it had set for itself.

Five areas to watchInvestors also need to be mindful of the fact that Harley also finances the bikes it sells, and last year operating income from financial services fell 2% to $278 million because of higher credit losses. That just underscores the overall weakness it's been experiencing, meaning investors should keep an eye on these five things:

  • Further deterioration in the financial segment
  • The aging and diminishing power of its core customer to drive sales
  • Harley's focus on high-end, high-priced bikes, despite its consumers still being financially strapped
  • Greatercompetition from traditional rivals likePolaris Industries, which resurrected the Indian nameplate to great fanfare (and sales)
  • New competition from small-bike makers like Honda, Kawasaki, and Suzuki

How Harley can be savedAlthough Harley-Davidson's stock has bounced almost 20% above the lows it hit last October when its third-quarter earnings report seemed to show it was changing gears and accelerating once more, fourth-quarter results indicate it really hasn't been able to get out of first gear yet.

Investors need Harley to first show it doesn't have to struggle to sell its big bikes here at home before hopping back on, but that may not happen for a while. Still, don't give up on the bike maker. These may be tough times for Harley-Davidson, but it's not Armageddon, and a lower price point for its stock could just be an investor blessing in disguise for realizing superior gains later on.

The article These Are Hard Times, Not End Times, for Harley-Davidson Inc. originally appeared on

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.