Honda Motors: North America Sales And Yen Weakness Will Carry Results
Honda Motors (NYSE:HMC) is scheduled to announce its first quarter earnings on July 31. The automaker expects a profit of $580 billion yen for fiscal 2014 (April – March), which is based on an assumption of 95 yen to a dollar. There could be some upside to this figure if the yen continues to remain weak. After briefly testing the 95 yen mark, the dollar is back closer to a 100 yen now. A weak yen bodes well for the profitability of Japanese companies since the overseas profits are translated back to more yen.
See our complete analysis for Honda stock here
North America is the most important region for Honda and accounts for about 40% of the total sales. Honda’s American sales, which are up 6.4% in the first half of the year, have more or less kept pace with the industry. [1] Honda’s sales are being helped by model refreshments of the Accord, the Civic and the CR-V, which together account for about two-thirds of the American sales.
The automaker’s luxury brand, Acura, has also posted growth of 6.2% through June, although the pace has slowed down lately. [2] Honda is pouring in $1 billion in order to reinvigorate its Acura brand after it lost favor with the American public. The automaker has already launched the refreshed versions of the RDX and the MDX this year. Since the luxury brands generally have fatter margins, the overall profitability could get a boost if Acura continues to do well.
After two years of impressive growth rates, the American automotive market is poised for consolidation. As a result, automakers are now turning their attention to luxury cars in order to keep the profits riding high.
China Still An Uncertainty
Chinese data has been sporadic for Honda. After the sales rose 4.8% in May, they fell 5.6% in June. [3] Since September last year, sales of the Japanese automakers have suffered due to a wave of anti-Japanese sentiment present across the general public in China over claims on the disputed islands. The islands are known as Diaoyu in China and Senkaku in Japan. China is one of the biggest markets for Honda with about a sixth of the total sales coming from the nation.
But Honda is optimistic about China. Recently, the Japanese automaker announced that it will increase its R&D expenses in China in order to develop vehicles tailored to the needs of the Chinese people. Before the end of 2015, the automaker plans to roll out 12 new models in China. In 2013, Honda will introduce the Crider, a mid size sedan, and the Jade, a multi-purpose vehicle. Within the next three years, Honda will also start the production of hybrid vehicles in the country. In fact, Honda is so confident about the success of its upcoming models that the automaker intends to double the sales to 1.3 million units annually by 2015.
Furthermore, Honda’s sales in India are growing at a fast pace after the automaker debuted a new diesel car called the Amaze. In the last three months, Honda has sold 45% more cars compared to the previous year. [4] India still accounts for a tiny fraction of the automaker’s total sales, so the effect won’t be evident in the upcoming earnings. However, gaining market share in India is critical as the country is slated to be one of the biggest auto markets in the world given its extremely low vehicle ownership rates at the moment (~20 vs ~90 for China).
Japan Will Be Tough
Japan accounts for about a sixth of Honda’s sales. The Japanese automotive market was artificially boosted with the help of government subsidies last year. The subsidies lasted till September and therefore the Japanese public rushed to register their vehicles before the incentives ended. As a result, we expect the automotive market in Japan to remain weak in 2013.
The passenger car market is down 8.5% in the first half of the year. Honda has fared even worse; its sales have tanked 15% through June. Thus, posting strong results in developing markets becomes all the more important since the North American market is likely to consolidate and slow down, while the Japanese market will probably flat out once its sales normalize.
We have a $42 price estimate for Honda Motors, which is about 10% higher than the current market price.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- U.S. auto sales, wsj.com [↩]
- Acura USA June 2013 Sales Results, July 2, 2013, acuraconnected.com [↩]
- Honda says June China car sales down 5.6 pct yr-on-yr, July 2, 2013, reuters.com [↩]
- India Car Sales Report: June 2013 [↩]