Foolish Forecast: Ducati Revs

In honor of the grand opening of the Fool's newest newsletter, Motley Fool Global Gains, henceforth we denizens of the Fool's main page are going to pay even more attention to stocks which reside beyond our fair nation's borders. So without further ado, allow us to introduce (or reintroduce, for readers of our Olympic special "Taking Stock of Italy") you to Italy's motorcycle magistrate, DucatiMotor Holding (NYSE: DMH), in this, our preview of its third-quarter 2006 earnings release, due out tomorrow.

What analysts say:

• Buy, sell, or waffle? Six analysts ride herd on Ducati, which scores a buy, a sell, and four holds.
• Revenues and earnings. Although quarterly estimates are lacking, the sole U.S.-based analyst in this pack predicts breakeven earnings for this fiscal year.

What management says:
Ducati doesn't make a whole lot of filings with the SEC. The most recent is from early August, and outlined the company's Board of Directors-endorsed financial results for the first half of 2006. In it, the firm described (euro-denominated) sales that were down 4% year over year "due to a reduction in sales in motorcycles and spare parts, partially offset by a positive product mix and increased sales in accessories."

The good news is that these are pretty much the results management was aiming to achieve. CEO Federico Minoli confided that the sales decline owed largely to a "planned reduction in volumes," which was itself part of a refocusing on selling higher-margin motorcycles.

What management does:
Mission accomplished. Gross margin for the first half of the year improved a whopping 590 basis points to 28.2%; the operating margin nearly tripled to 7.2%; and wonder of wonders, Ducati netted itself a profit of 2.3 million euros -- quite an improvement over last year's first-half loss. None of this is yet showing up in the rolling net margins, however, which continue to suffer from massive charges for asset writedowns and restructuring costs, plus a hefty 29.6 million euro tax charge in the December quarter.

One Fool says:
There's no two ways about it -- Ducati dug itself a deep, dark hole in Q4 last year, one which it will take a full year's results for the rolling results above to climb back out of. In addition to the post-operating profits charges described above, the firm also took a 19.6 million euro depreciation charge that continues to weigh on operating profitability. In short, the income statement is a mess, and from a trailing-12-month perspective, will continue to look so for a while.

It's understandable, therefore, that management wants investors to focus on its balance sheet. There, Minoli says we should watch for the firm to "maintain a tight control on sales and production in order to avoid excessive stock [Ed.: meaning "inventory" in this context] and to successfully prepare for the launch of the new models." With inventories already down 7% year over year in the first half, which exceeds the 4% sales decline, I'd say Ducati is off to a roaring good start in this regard. In tomorrow's news, just make sure you don't see the company tap the brakes.

Competitors:

• Harley-Davidson (NYSE: HOG)
• Honda (NYSE: HMC)
• Polaris (NYSE: PII)

Declining sales and miserable margins don't make the cut at Motley Fool Global Gains, where we prefer to seek out the best international stocks for our subscribers. But if Ducati continues to make progress in its turnaround, sure, we'll take a look. Meanwhile, if you're interested in taking a look at what we've already scoped out for our members, take a free tour of the publication just by clicking here.

Fool contributor Rich Smith does not own shares of any company named above.