Honda Earnings Point to Further Downside on Quake, Currency

April 29th, 2011 by Trefis Team
-4.14%
Downside
33.85
Market
32.45
Trefis
HMC: Honda Motor logo
HMC
Honda Motor

Honda (NYSE:HMC) is one of Japan’s leading automakers and is the eighth largest car manufacturer based upon global vehicle sales in 2010 and the third largest in Japan. [1] We earlier assessed Honda’s near-term challenges as it recovers from the tragic Japan tsunami and earthquake in a note titled Honda to Take its Lumps in Japan but Will Bounce Back. The car giant competes like BMW (GR:BMW), GM (NYSE:GM), Daimler (ETR:DAI), Audi (NSU:GR), Ford (NYSE:F), Toyota (NYSE:TM) and others.

We have a price estimate of $34.04, which is roughly 10% below the current market price.

Earnings Take a Hit on Quake

Relevant Articles
  1. Growth Of Chinese EV Players A Looming Threat For Honda Stock?
  2. What’s Happening With Honda Stock?
  3. Honda Stock Looks Like A Buy Following Strong Q3 Results
  4. Is Honda Stock A Buy As Motorcycle Business Shines?
  5. Is Honda Stock A Buy At $27?
  6. Forecast Of The Day: Average Price of Honda Vehicles

In the latest quarter, Honda net income tumbled 38% vs. the same quarter last year, and despite cost reduction efforts, decreased R&D expenses and increased sales volume and improved model mix in certain markets, Honda’s consolidated operating income decreased by more than 50%. [2] In Asia, Honda’s cost of sales, SG&A and R&D expenses increasing by almost 10% in this quarter from a year ago, which contributed to the drop in operating income. Most of Honda’s vehicles sold in Asia source auto parts from Japan’s Northeastern Tohoku region which suffered huge losses in the earthquake.

We estimate SG&A for Honda’s motorcycle, automotive and power-products business to be around $18 billion, which implies almost a 2.2% decline in SG&A as a percentage Honda’s automotive, motorcycle and power-product revenues. [3]

Currency Worries

A strong Yen to Dollar relationship has hurt many Japanese companies, including Honda. In Q1 2011, this led to the 2.9% in revenues while at constant exchange rate from a year ago, Honda’s total revenues would have instead appreciated by 3.3%. (FY2011 Financial Results Presentation))

11% Downside Risk

In our scenario, SG&A costs as a percentage of revenues continue to increase by 2.2 percentage points this year and by 1 percentage point in 2012 as Honda continues to recover from the earthquake damage before reverting to our base case forecasts for subsequent years. This scenario would imply a price estimate for Honda of $30.30, which is almost 11% further downside from our current price estimate of $34.

You can test this scenario and others by dragging the trend line in the interactive chart above.

See our full analysis and $34 price estimate for Honda stock.

Notes:
  1. Hyundai Kia Overtakes Ford While GM Threatens Toyota in 2010 Global Sales, NY Times online, April 6, 2011 [↩]
  2. Honda’s 2011 first quarter earning results [↩]
  3. We estimate this by linearly annualizing the 2011 Q1 total SG&A figure, multiplying by the revenues from non-financial business as a percentage of total revenues and assuming average exchange rate of 82 Yen/USD. [↩]