Honda Can Motor To $42 On Higher Margins And Car Sales

by Trefis Team
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Honda Motors (NYSE:HMC) has surged more than 30% in the last few months as a run of strong quarterly results has pushed the stock higher. Furthermore, we believe there is scope for further upside as a weakening yen combined with increasing penetration in developing markets and the revival of the Acura brand bode well for the company’s profits. Here are some of the trends to watch out for.

1) Margin Expansion

Gross margins jumped 190 basis points to 27.5% last year as the automaker regained its pricing power. With the yen falling 20% in the last four months, its margins could get a further boost. In fact, to take advantage of a weak currency, Honda is reportedly opening a new plant in Japan, its first in almost 50 years. The plant will have a capacity of 250,000 units and will be primarily used to manufacture compact cars like the Fit. [1]

Over the years, a strong yen had forced Honda to shift its production overseas to the extent that it only produced a quarter of its vehicles in Japan. But with this latest move, the focus is once again back on producing cars domestically. Exporting vehicles from Japan in the wake of a weakening yen will soar profits as costs will be incurred in yen while profits will be earned in foreign currencies.

See our complete analysis for Honda stock here

2) Boosting Presence In Developing Markets

In emerging economies, Honda plans to boost sales by strengthening its portfolio of smaller cars to appeal to the more price sensitive customers. The newer version of Fit (or Jazz as it is called in some countries) will be launched next year. A new SUV and a refreshed City (sold outside North America), both of which will share a common platform with the Fit, will also be rolled out.

In India, the automaker plans to accelerate vehicle sales by introducing its first diesel car in the country, called Amaze, within the next few months. [2] Honda has invested $600 million to commence production of the diesel-powered entry-level sedan. Honda’s Indian sales had started to stagnate due to the lack of a diesel car in its portfolio. Demand for diesel cars has outpaced that of gasoline cars in the country since diesel is priced much lower than gasoline.

Honda is also pouring in $328 million in Indonesia to build a new automobile plant to boost production of its multi-purpose vehicles (MPV) such as the Brio and the Jazz. This will be Honda’s second plant in Indonesia. The new plant plant is scheduled to start production in 2014 and, once functional, will triple Honda’s output to 180,000 vehicles from 60,000 currently.

3) Acura Revival

Sales of Acura, the company’s luxury division, had peaked at 209,610 in 2005 but the brand fell out of favor with the customers since, partly because of fewer investments into the brand. Honda could only manage to sell 156,216 Acura cars last year. [3] In order to turn around its Acura brand, Honda is pumping in $1 billion which will see the automaker launch an array of refreshed models such as the RLX, the MDX sport wagon and the NSX super sports car. [4]

The American luxury car market was about 1.6 million units big in 2012, up 12% over 2011. That means the luxury car market grew roughly at the same rate as the broader automotive market.

This year, the total automotive market is expected to grow strongly again, although the rate at which it expands will probably slow down to 6-7%. Assuming that the trend continues, the demand for luxury cars will grow at the same rate as the overall automotive market.

Sales for Acura are up 6% through February, so that means it is already keeping pace with the market. [5] With this turnaround plan, we could very well see the brand outpacing the luxury car market in the United States. Moreover, the more profitable luxury cars will widen the company’s margins.

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Notes:
  1. Honda to Open New Plant in Japan for First Time in Nearly 50 Years, wot.motortrend.com []
  2. Honda Amaze coming on April 16, hindustantimes.com []
  3. Honda Revamps Acura MDX Seeking Luxury SUV Sales Gains, March 27, 2013, bloomberg.com []
  4. Honda throws US$1b lifeline to Acura, February 27, 2013, scmp.com []
  5. U.S. auto sales, wsj.com []
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