Riddle me this: What happens when you rev the motor, while pressing firmly on the brakes?

You don't have to be a card-carrying member of a motorcycle gang to know the answer. As soon as you let off those brakes, Fool, yer gonna burn rubber … and that's just what I expect to see at Harley-Davidson (NYSE: HOG).

It's been a good 48 hours since Harley released its fiscal-first-quarter 2010 earnings. Plenty of time for the mainstream media and usual rogues' gallery of analysts to weigh in on the news. (Actually, Citigroup and Goldman Sachs were carping from the sidelines even before the news came out.) With Harley's shares revving 7% higher on the news, you can tell most people liked what they saw. By now, you also know why everyone thinks the shares reacted so well. According to The Wall Street Journal, it came down to two things:

  • Remove the numbers for Harley's Buell and MV Agusta divisions, both of which are going bye-bye, and focus only on the eponymous hogs, and Harley turned in a better-than-expected performance last quarter -- $0.29 per share in profit, versus $0.22 expected.
  • Harley's embattled finance unit, suffering from the same credit crisis that's plagued fellow industrial heavyweights dabbling in banking -- Textron (NYSE: TXT), General Electric (NYSE: GE), and Caterpillar (NYSE: CAT) -- turned its first profit in four quarters.

Great news? No doubt. But it's hardly "news" if everyone's talking about it. As an investor, you don't find your edge by looking where everyone else is already staring. So -- this being the Fool and all -- let me instead tell you what's really important about Harley-Davidson's report.

One word; starts with "I"
Yep. Just one word. You see, inventories are key to this business. The more bikes out there, the more it swamps the market with excess inventory, the worse Harley does. In contrast, when Harley takes a tighter rein on its business -- sort of like it's four-wheeled cousin Ford (NYSE: F) has done -- business can boom.

So it's gratifying to see Harley proving itself serious about fixing its inventory problem. With sales down 19% in Q1, Harley chopped 24% off its inventory number year over year. That helped the company generate $186 million in free cash flow in Q1, versus $247 million in cash burn this time last year. Best of all, Harley is promising to ship about 7% fewer bikes this year than last, keeping a tight hold on its product.

Foolish takeaway
So far, Harley's doing everything right to right its business. And the folks who were saying Harley should just throw in the towel and sell out to private equity? I don't expect we'll be hearing from them again anytime soon.

Fool contributor Rich Smith does not own shares of any company named above, but Ford Motor is a Motley Fool Stock Advisor pick. The Fool has a disclosure policy.