It's all over but the crying.

Earlier this week, Harley-Davidson (NYSE:HOG) stock lost 6% of its market capitalization after reporting disappointing earnings news for its fiscal second quarter 2017. Harley followed up that loss by losing another half-percentage point or so on Wednesday, and it's down again in early Thursday trading.

But how bad was the news, really, and was it bad enough to justify all the continued selling of Harley stock? Or are investors maybe, just maybe, overreacting a bit here? Let's find out.

Mechanic working on bike

No doubt about it, Harley-Davidson stock could use a tune-up after this week's earnings. Image source: Getty Images.

What Harley said

Harley-Davidson released its fiscal Q2 2017 earnings news on Tuesday, reporting  $1.77 billion in quarterly sales (down 5% year over year and about 1% below analyst estimates ), and profits of $1.48 per diluted share -- likewise down about 5%, but 8% above estimates.

The company's ability to "beat" earnings estimates, despite "missing" on sales, owed to the strong profit margins that Harley earned on the sales it did make in the quarter. As CEO Matt Levatich argued, the company delivered "strong margins ... despite challenging market conditions, particularly in the U.S."

How strong were those margins, exactly? Well, strong enough to withstand a bit of fact-stretching to be sure. Gross margins at Harley actually inched up only 0.1% year over year in Q2. Operating profit margins, on the other hand, did rise by a more significant one full percentage point. Still, the 20.3% operating profit margin that Harley says it posted in Q2 appears to be the strongest profit margin the company has achieved in at least three quarters, judging from data provided by S&P Global Market Intelligence.

What Harley said next

The problem was Levatich went on to warn that these strong margins will not last. "Given U.S. industry challenges," said the CEO, management has been forced to lower its "full-year shipment and margin guidance" for the rest of this year. Going forward, Harley now believes it will have to cut motorcycle shipments by between 6% and 8% in comparison to last year -- including a massive 10% to 20% reduction in units shipped in Q3.

And the 1% operating profit margin improvement Harley achieved in Q2? In Harley's rearview mirror, that object is already farther away than it appears. Harley says investors can expect to see operating profit margins shrink by 1% in 2017. That implies a full-year operating margin of perhaps as little as 16.8% -- Harley's worst result since 2010.

What's wrong with Harley?

Why must Harley cut shipments so drastically, and accept earning so much worse profit margins on its wares? Levatich noted that "retail motorcycle sales in the U.S. were down 9.3 percent compared to the year-ago quarter, with the overall U.S. industry down for the same period." Levatich took no pains to explain how much everybody else's sales were down relative to Harley's decline, however -- and I fear it's clear why he didn't.

You see, Levatich also noted that Harley-Davidson's "U.S. market share for the quarter was 48.5 percent in the 601cc-plus segment." While Levatich made no attempt to underline the point, that's a pretty big drop from the 51.3% market share that Harley-Davidson enjoyed as recently as three months ago. It's also a sharp reversal from the "market share gains" that Harley was ballyhooing in its Q4 report back in January.

Valuing Harley-Davidson stock

So is it time for investors to abandon ship? Believe it or not, I wouldn't be so quick to bail out. Bad as things seem, Harley still earned some $606 million in profit over the past 12 months, and more importantly, generated free cash flow of $1.1 billion. Weighed against the firm's $8.5 billion market capitalization, that works out to a P/E ratio of 14, but a price-to-free cash flow ratio of only 7.7.

With Harley-Davidson stock still yielding a very generous 3% dividend, and analysts looking past its current weakness to forecast long-term earnings growth of 11% annually over the next five years, even with all the bad news ahead of it, at worst I see Harley-Davidson stock as fairly valued today. At best (valuing the stock on its free cash flow), the stock actually looks cheap to me.

Long story short, the news at Harley-Davidson looks bleak. But even so, the price of Harley-Davidson stock is cheap. I wouldn't be too quick to throw in the microfiber buffing towel on this one.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.