Honda Motors (NYSE:HMC) is the latest automaker to pour money into its luxury division, called Acura, in order to revive its fortunes. Japan’s third largest automaker is reportedly investing $1 billion to launch an array of refreshed models such as the RLX , the MDX sport wagon and the NSX super sports car. The luxury segment is heating up in the U.S. because of the higher profitability of these cars and due to continued growth in auto sales in this market.
- How Has Honda Motor’s Revenue Composition Changed In The Last Five Years?
- How Much Did Honda Motor’s Revenue & Gross Profit Grow In The Last Five Years?
- What Percentage of Honda’s Stock Price Can Be Attributed To Growth?
- What Is Honda’s Revenue & Expense Breakdown?
- How Much Do Auto Companies Invest In Research And Development Comparatively?
- What Is Honda’s Fundamental Value Based On 2016 Expected Results?
Besides the new models, the automaker will attempt to makeover its image since the Acura brand is seen as a grade below its German counterparts. The prestige associated with a brand is pretty important in the luxury car market as the better the perceived value, the higher the premium that customers are ready to pay.
The compacts and sedans don’t have anywhere near the same profitability as trucks and SUVs, and therefore, it becomes imperative for them to concentrate on their luxury divisions to support margins. Moreover, since auto companies outside the Detroit Three have a limited presence in the pickup truck segment, generating profits through their luxury cars becomes all the more important. Due to the ongoing economic turmoil in Europe, America has become a critical market for all the major companies.
Although the luxury divisions often don’t make the headlines in terms of the unit sales, their fatter margins make them an indispensable segment for the company. The luxury cars account for only 12% of the sales but their contribution to the profits could be as high as 50%. 
Mercedes is already lowering the entry point of its luxury cars through the new CLA which should open a whole new demographic for the automaker. BMW and Audi are already present in the entry level luxury segment through the 1-Series and the A3 respectively. Americans too, aren’t lagging behind in their attempt to cash in on this booming luxury market. GM is currently in the process of reinvigorating its Cadillac division with two new models, the ATS and the XTS, having already launched last year. Although sales for Cadillac were flat in 2012, they started to pick up in the final few months after the new models were released.
Similarly, Ford is in the process of reinvigorating its Lincoln brand by introducing four new models in the next four years (including a new MKZ sedan) and bought an ad spot in the Superbowl to promote it. Sales in 2012 were a lackluster 82,150, down 4.1% over the previous year indicating room for improvement.  Overall, American luxury car market grew 12% to 1.6 million units in 2012 and sales for 2013 are expected to be strong as well. 
We have a $36 price estimate for Honda Motors, which is about 10% higher than the current market price.Notes: