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Investment Overview for Honda (NYSE:HMC)
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Honda is the world’s eight largest automaker and the largest motorcycle producer based on 2012 sales. In addition to producing Honda branded vehicles (cars, vans, SUVs, trucks) and motorcycles, the company is also a leading producer of powersport vehicles (ATVs, watercrafts) as well as other motor-based products (generators, pumps). Honda also provides financing, in the form of leases and loans for its products. Honda's financing business is a significant contributor to the company's profits. Honda is headquartered in Tokyo, Japan.
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Total Cars Sold in the US:The U.S. automotive market showed strong signs of resilience in 2011 and registered a 10% growth in vehicle sales to reach approximately 13 million. In 2012, the figure swelled to 14.5 million. The U.S. automotive industry is expected to carry on the growth trajectory in 2013 although the rate of expansion might slow down. The U.S. automotive industry seems decoupled to a large extent from the sluggish European growth. Robust sales growth could translate into better revenue realization for Honda in the U.S., one of the most critical market for the company.
Going forward, the growth in the U.S. automotive industry would be very critical for the company to maintain growth in the top line.
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Total Cars Sold Internationally: According to statistics and analysis of the China Association of Automobile Manufacturers (CAAM), China registered automobile sales of approximately 19.5 million for 2012, an increase of 4% from a year earlier. The automotive market in China has more than doubled in size within a span of 4-5 years. With approximately 87 cars per thousand people in China, there is definitely an enormous opportunity to be tapped in China. The surge in demand in Chinese automotive market presents a huge opportunity for the company and it might become a crucial factor in revival of Honda's lost market share in recent times.
Europe has been going through the toughest times since the adoption of a single currency in 1999 and the crisis that started from Greece has spread through other peripheral countries as well. The economy is still in distress and governments across the Europe are adopting austerity measures to ride through the situation which is not going to help the industry either. Although, the severity of the economic distress will be different for different economies, the overall trend in sales as well as production, is expected to be a declining one. A worsening situation in Europe could prove to be a major dampener for the company.
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International vehicle market 4x larger than North America vehicle market
In the U.S., 2012 auto sales amounted to 14.5 million according to a recent report by J.D. Power and Associates. In comparison, there were around 4x as many vehicle sales (65 million) internationally including Japan.
High gross margins for motorcycle business
We estimate that Honda's motorcycle business had gross margins of 31.2% compared to Honda's automotive business gross margins of 27.50% in calendar year 2012.
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Honda is promoting low cost hybrids
With oil prices bound to increase in the long term, fuel efficiency and environmental concerns will likely remain of long-term importance to car buyers. Although Honda was the first company to commercially sell hybrid vehicles in the United States (the Honda Insight), the company quickly fell behind Toyota in sales for alternative fuel vehicles. Over the last decade, Toyota, with the success of Prius, has sold considerably more hybrids than Honda. In response, Honda announced an effort to regain its preeminence in the hybrid sector by launching a series of low-cost hybrids models that will be priced to reduce the considerable premium hybrid buyers currently pay for hybrid technology. Honda's new hybrid models will reduce this premium from one to two thousand dollars per vehicle in a bid to recapture buyers from Toyota.
The Honda FCX Clarity is a hydrogen powered car with twice the efficiency of traditional gas and electric hybrid vehicles and doesn't emit greenhouse gases. Honda is looking for a way to compete in an auto market that is increasingly focusing on green technology. With the Clarity, Honda may find itself back in the game. In 2010, approximately 200 FCX Clarity vehicles were sold worldwide because there aren't too many hydrogen fueling stations around. Honda plans on producing the Clarity on a mass scale by 2018.
As Japan continues to grow, the demand for luxury vehicles will rise
About 15% of Honda's sales are concentrated in Japan, where the population is aging: 10% of the population was 65 or older in 1990, and by 2007 that number had doubled. Aging populations tend to save less and spend more on luxury items. In addition, much of Honda's production takes place in Japan, which provides generous national health insurance. Although Honda has to pay for some of its Japanese employees' insurance in the form of higher taxes, American automakers pay for the entirety of their employees' insurance. This has become a competitive advantage to non-U.S. automakers, which have much less of a health insurance burden.
Natural disasters to impact production
The massive Japanese earthquake and tsunami forced shutdowns of some of Honda's Japanese facilities. Moreover, several automotive part suppliers in north-eastern Japan, close to the epicenter of the natural disaster, were affected. Natural hazards like these impact overall production and thus impact sales.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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