Expansion Costs And Weak Japanese Sales Dent Honda’s Profits

by Trefis Team
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Honda Motors’ (NYSE:HMC) profits fell 7% in the first quarter as weak Japanese sales and global investments to support the expansion plans dented the automaker’s quarterly profits. Total revenues jumped 16% to JPY 2834 billion (~$29 billion), helped primarily by the yen devaluation. Similarly, a weak yen also boosted the operating income to JPY 184 billion yen vs 176 billion yen in the previous year quarter. However, the net income fell 7% to 122.4 billion yen (~$1.2 billion). [1]

A dip in the profits did not deter Honda from changing its guidance. It still expects a net income of 580 billion yen (~$5.9 billion) for fiscal 2014. The automaker also stuck to its previous forecast of selling 4.4 million vehicles in the current fiscal.However, it did make slight changes to the currency assumptions. Earlier, the forecasts assumed an exchange rate of 95 yen to a dollar. This has been changed to 96 yen to a dollar.

See our complete analysis for Honda stock here

Last year, Honda unveiled its ambitious mid-year plan of selling 6 million vehicles annually by 2017. As a result, it is building new manufacturing facilities as well as raising the capacity of its existing plants. To take advantage of a weak domestic currency, Honda started building a new production plant in Japan, which recently became functional.

A greater proportion of production in Japan will benefit Honda’s margins now that the yen has depreciated against the dollar. The same amount of foreign currency will yield more yen. Besides Japan, Honda is also looking to increase production in China, Thailand and Mexico.

Asian Sales Outlook

Honda expects majority of the sales gain to come from Asia. In China, the automaker will benefit from a favorable comparison since the sales were pretty low after September, when tensions between China and Japan sparked. However, China will continue to pose uncertainty at least in the near term. Although Honda’s sales finally turned positive in May, they declined again in June.

In the long run, Honda is bullish on China. It is developing cars exclusively for Chinese customers with an aim to introduce a total of 12 new models in the nation before 2015. In 2013, Honda will introduce the Crider, a mid size sedan, and the Jade, a multi-purpose vehicle as well. China is one of the biggest markets for Honda with about a sixth of the total sales coming from the nation.

Honda’s sales in India are zooming ever since the company launched its new diesel vehicle called the Amaze earlier in the year. The model was tailor made to suit the Indian needs and is priced at a point which should see the volumes high. Honda’s Indian sales surged 250% to 9,297 units in June. [2]

Honda’s Japanese sales were down a massive 24%. But Honda had a tough year-over-year comparison. Japanese sales were unusually high last year due to government incentives which artificially boosted the automotive market. Thus, the fact that the Japanese automotive market is down 8.5% in the first half of the year doesn’t come as a surprise. As sales normalize, the rate of decline should slow down.

Looking To Consolidate In America

It has been another solid year for the American automotive market with sales up about 7% in the first half of the year. [3] However, most of the sales gains are coming from pickups and SUVs. The rebounding U.S. housing market is fueling the growth of pickups as they are used extensively in construction activities. Honda has traditionally had a greater presence in the passenger car segment, so it might not be able to keep pace with the overall industry. In fact, in the latest quarter, Honda’s sales could only manage to rise 2%.

North America is the most important region for Honda and accounts for about 40% of the automaker’s total sales. 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.

Keeping this in mind, Honda is resuscitating its Acura brand. The automaker has already launched the refreshed versions of the RDX and the MDX this year. The MDX will also bulk up Honda’s presence in the SUV segment. Overall, Acura’s sales are up 6.2% through June. Since the luxury brands generally have fatter margins, the overall profitability could get a boost if Acura continues to do well.

We have a $42 price estimate for Honda Motors, which is about 10% higher than the current market price.

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  1. Honda Investor Relations []
  2. Honda sales up 250% in June as ‘Amaze-ing’ run continues, July 1, 2013, profit.ndtv.com []
  3. U.S. auto sales, wsj.com []
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