Honda (NYSE:HMC) delivered impressive earnings in the last quarter in spite of still being scarred by the Thailand floods and Japan earthquake. The company saw improved sales in its motorcycle, automobile and power segments along with stable improving results from its financial segment.
Honda (NYSE:HMC) competes principally in the automobile market with other global car manufacturers such as Toyota (NYSE:TM), GM (NYSE:GM), Ford (NYSE:F) and Hyundai (PINK:HYMLF). Our current price estimate of $44 for Honda’s stock is around 15% above the current market price.
North America and Japan auto sales drive growth
While Honda’s motorcycle sales grew at 17.8% in the last quarter, car and power product sales were up by almost 15%. The company’s sales for the quarter grew by 8% to $29.7 billion while profit grew by 61% to $882.7 million.
The company’s improved sales in automobile segment were mainly driven by the resurgence of the auto industry in the U.S and Japan. In Japan, the government created a positive environment for the auto industry through tax incentives for fuel-efficient cars and new subsidies to scrap older vehicles.
Car industry sales in Japan jumped by almost 47.5% in the last quarter. The U.S. auto industry growth was mainly driven by a recovering economy, an aging fleet of vehicles and lower impact of oil prices on end users. Car sales by all automotive manufacturers in U.S. jumped by 19.5% in the last quarter.
Honda’s Japan sales were helped by its introduction of new Fit Shuttle / Hybrid, N-Box and Freed Hybrid cars. In North America, the biggest automotive market in the world, Honda’s unit sales were up over 100% as the company’s Civic, Accord and Odyssey models continued to attract customers in large numbers.
Expansion in Operating Margins
Honda saw a pleasant expansion of operating margins in all its units. While the both motorcycle and automobile operating margins were helped by increased sales volume and a favorable model mix, the automobile segment was also helped by a reduction in SG&A costs. The factors hurting the margins were increased R&D costs and a negative effect of currency. The operating margins for power systems was also helped by sales volume and favorable model mix, but was hurt by an increase in SG&A costs.
The favorable macroeconomic conditions for the auto sector are expected to continue till the end of this year and Honda will do well if it is able to carry along the momentum of these earnings. We expect its focus on fuel efficiency and new models to yield rich dividends in the coming quarters.