One of my readers, Joseph Basillio, a limousine driver, realized a life-long dream in December when he bought a Harley from a neighbor. He loves the used bike much more than the 200 shares of motorcycle giant Harley-Davidson he bought at the same time at $73.55 a share, he writes.

Unfortunately, his stock timing was awful. The shares, which closed Friday at $58.75, have taken a beating this year, plummeting about 20% in response to downward revisions in earnings estimates after a recent strike at a manufacturing facility, concerns over the upcoming retail season, and potentially higher credit losses in the company’s financial services operation.

In a recent e-mail message in which he discussed his stock purchase, Mr. Basillio wrote that his broker, who he says is more wrong than right, likes the stock and is advising Mr. Basillio to average down his purchase price by buying another 200 shares. “I don’t know whether I should say goodbye and take my loss or follow his advice. What do you think?” he asks.

In this case, he may want to listen to his broker. At least, that’s Merrill Lynch’s thinking. It believes the risks — which could create some near-term market uncertainty — are largely reflected in the stock price. A Merrill analyst, Hakan Ipekci, says he thinks the shares could rebound roughly 27% over the next 12 months, to about $75.

Noting that the company still faces long-term challenges in America, such as an aging customer base and a growing used motorcycle market, the analyst says he believes Harley’s stock — which is trading at close to 13 times his estimated 2008 earnings — offers a compelling entry point, given what he sees are some upside earnings surprises that Harley could generate during the next 12 to 24 months. These include such areas as international growth, margin expansion, and share repurchases.

Mr. Ipekci also maintains that despite decelerating American retail growth, investors should keep in mind that Harley ‘s strong brand, impressive dealership network, high returns on invested capital, and consistent earnings momentum remain intact.

During the past two weeks, Mr. Ipekci says he called about 30 Harley dealerships to discuss recent business trends. Although it’s still quite early in the retail season, dealers indicated a respectable start, with a stronger pickup in traffic and sales in the South, which has enjoyed more favorable weather. Given current trends and relatively tough comps of 5.8% from the first quarter of 2006, the analyst says he figures retail sales will be up slightly in this year’s first quarter.

Mr. Ipekci says he expects dealership inventory levels — which have been a major overhang on the stock — to be less of an issue this year, owing to reduced shipments during the strike. He estimates that if American retail sales rise 2% in the current quarter, this country’s dealership inventory could decline by close to 10,000 units year-over-year by the end of the quarter.

Mr. Ipekci reckons it’s too early to tell how the rest of the retail season will fare, but he says he doesn’t expect any major dropoff in sales as he expects the company’s new Twin Cam 96 engine to attract the interest of new and existing customers.

He also made the following observations:

• Given a less favorable credit market environment, Harley’s financial services income, 13% of total 2006, income should decline about 5% this year after more doubling between 2002 and 2006.

• Because of the strike, unit shipments should rise only slightly this year, but Harley’s total such shipments can grow at a compounded annual growth rate of 5% between 2006 and 2009, driven by international markets.

• Harley is still in the early stages of its international expansion, and overseas shipments should grow at a CAGR of between 10% and 12% during the next few years, versus between 2% and 4% in America.

• The company should generate roughly $1 billion in cash annually during the next few years. After taking out the dividend payments of about $225 million a year, it still has significant cash power to repurchase shares, supporting earnings-per-share growth in the low to mid-teens.

Last year, Harley earned $3.93 a share on sales of $6.1 billion. Merrill’s profit estimates call for $4.12 a share this year, followed by $4.75 in 2008 and $5.35 in 2009.

Merrill’s bottom line is pretty clear: Despite some bumps in the road, Harley still has the wherewithal to compete on the fast investment track.

Maybe so, but it’s worth noting that skeptics abound, with the latest figures showing a hefty short interest (a bet the stock price will fall) of 18.2 million shares, or 7.1% of the float.