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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.
Trefis Forecast Rationale for Honda's North America Vehicle Market Share
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This represents the market share of Honda branded vehicles in Europe, Asia Pacific (excluding Japan), South America and Africa based on the number of units sold.
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${forecast} has increased over the years from 7.2% in 2005 to 9.1% in 2010 due to strong brand name and quality vehicles by Honda. However, market share was impacted negatively in 2011 as Honda faced production and supply chain constraints caused by the tragic tsunami.
Sales in 2012 in North America have been strong and we have witnessed Honda stealing back its lost market share. For 2012, the market share stood at 9.1%. From 2013, ${forecast} should not see too much of a deviation.
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Trefis considered the following factors for its forecast
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- Capacity additions to help boost production
- Honda is planning several capacity initiatives to ensure production is sufficient to meet North America’s growing demand. The firm is planning to ramp up future production in the US from 1.63 million in 2011 to 1.83 million by 2014. Recent other highlights include
- Honda added or reinstated a second shift at its Indiana, Ohio and Canada factory for the first time since the recession of 2008.
- Honda expanded its production capacity in Mexico. The new plant will start in 2014 with capacity increasing from 60,000 units in 2011 to 200,000 by 2014.
- Increase in production capacity at the plant at Alabama from 300,000 units to 340,000 units. Models produced at the Alabama plant include the Odyssey, Pilot and Ridgeline.
- New product line up
- Honda launched the new civic in April 2011 and new CRV was introduced in December 2011.
- Honda plans to revamp nearly 77% of its US line up by 2013. Following its overhaul of the entire civic lineup in May 2011, the firm launched a new version of the CRV in December 2011.
- Honda plans to launch new versions of the Honda Accord and Accord Coupe in the August-September and September-October time frame, before the introduction of the Accord PHV in the October-December period.
- The company plans to sell approximately 1.43 million units of Honda and Acura combined during 2012, a growth of 20% over 2011 levels.
- Honda plans to launch the Fit EV in Japan and the US in 2012.
- Honda is planning on developing a plug in hybrid device and planning to introduce a mid size sedan equipped with the device in 2012.
- Fuel efficiency initiatives
- As fuel prices increase, auto manufacturers will be pressured into developing more environmental friendly cars. Honda plans to improve fuel efficiency for all its categories of cars including the mini, midsize and the SUV.
- There has been a surge in demand for compact passenger cars and HEV’s due to high fuel prices. Honda has been aggressively making efforts to ensure production of a variety of fuel efficient vehicles. On November 30th, 2011 at an auto show in Tokyo, Honda announced a technology for the next generation of automobiles called “Earth Dreams Technology”. The aim of this is to improve driving performance and enhancing fuel efficiency. Through its implementation, Honda aims to achieve fuel efficiency for all categories of its vehicles within three years and setting a goal of reducing CO2 emissions by 30% in 2020 compared to 2000 levels.
- Examples of Honda’s fuel efficiency vehicles include the Civic Hybrid and Honda CR-Z. The firm recently announced the launch of the Honda Fit EV which will hit dealerships in the summer of 2012.
- Purchase incentives
- Honda continues to lure new customers with exciting new offers such as low financing offers, lease offers, promotional discounts and more.
- In 2011 when the firm was hit hard by the earthquake in Japan, Honda launched the “Honda Promise Program” which allows customers to take advantage of the incentives being promoted at that time if the vehicle they desired was not available at that point in time.
- Purchase incentives during the October – December 2011 period averaged $2,257 per car compared with $2,219 per car in July- September, according to AutoData.
- Technology improvements
- Honda has redesigned all six classes of its gasoline engines in a bid to keep up with improved fuel efficiency standards as part of its new framework for powertrains, “Earth Dream Technology”. New features of its redesign include direct injection DOHC, VTEC and idle stop to improve power output and efficiency.
- Financing availability
- Honda can avail low cost of financing for expanding its operating since its a Japanese company where interest rates are very low.
- The company maintains a strong balance sheet and healthy cash flow balance.
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- Supply disruptions
- During the 3rd quarter ending Dec 31st, 2011, sales in the US were impacted due to limited supply availability resulting from the Thai floods. This follows from the impact the Japanese earthquake had on production earlier in the year. Despite recovering to full production levels in December, management believes that Honda will not be able to make it up, resulting in a 19% decline in retail sales year over year.
- Sales growth slowing
- Honda announced its 2012 guidance of selling 300,000 units of the new Accord. Sales of the Accord have been consistently falling since its peak in 2001 at 415,000 units due to discontinuation of models and natural disasters. The 300,000 sales figure factors in sales of the Accord coupe and plug in hybrid versions thus actual sales of the car have declined. Other car manufacturers such as Nissan with its Altima brand and Ford with the Fusion brand have filled this gap in sales. Honda competes with other manufacturers such as Volkswagen (Jetta), Kia (Optima) and Hyundai (Sonata).
- Competition can hurt Honda's market share
- There is enormous competition in the automobile industry with automakers such as Toyota, Ford, Nissan, General Motors, Daimler, Volkwagen and Hyundai among others.
Back to Company OverviewHow 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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