Honda To Post Strong Profits On The Back Of Weak Yen
Honda Motors (NYSE:HMC) is scheduled to announce its Q3 earnings on January 31. During the previous earnings release, Honda reaffirmed its goal of selling 4.43 million units and generating a net income of 580 billion yen (~$5.7 billion) in fiscal 2014. But as recent quarters have shown, profits of Japanese companies have been dependent more on currency fluctuations than on the number of units sold. For example, Toyota’s profits jumped 70% in the first quarter despite selling fewer cars. For Honda, the corresponding figure stood at 46% on a unit sale gain of 5.1%. Honda is less sensitive than Toyota to a weak yen since it has a greater proportion of production outside Japan.
We have a $43 price estimate for Honda Motors, which is about 5% above the current market price.
Honda Likely To Beat Guidance
Most of the Japanese companies had a guidance of about 96-97 yen to a dollar while making their profit projections. However, the yen has slid further in the last three to four months, ever since the Fed first warned about tapering of its Quantitative Easing program. As of now, a dollar yields about 103 yen. Thus, you could see Honda beating its profit guidance simply due to favorable currency fluctuations.
Ever since Mr. Shinzo Abe stepped into the PM’s office late in 2012, the yen has depreciated ~30% against the dollar. This has benefited the country’s automotive companies since overseas profits now translate back to more yen. Since companies usually hedge against currency fluctuations through forward contracts, the actual price realization might be different from the spot prices. Thus, the magnitude of Honda’s profits will rely on the level of price realization to a great extent.
Unit Sales Remain Strong
North America is the biggest market for Honda and accounts for more than 40% of the unit sales. Unit sales in the U.S. were relatively weak in the last quarter of the year, with sales growing at a mere 1.9% in December. However, sales could accelerate in 2014 with the introduction of the new Fit. Honda is building a new manufacturing plant in Mexico that will be complete by spring 2014. Once complete, the new plant will be able to churn out 200,000 Fits annually, and will act as a hub for distribution to North America and Brazil.
Another vehicle that could boost sale is the Honda Vezel, the automaker’s first crossover SUV. Both the Fit and the Vezel are built on the same vehicle platform. The Vezel went on sale in Japan in the last week of December, and will be eventually launched in the U.S. in the second half of 2014.
In China, things have finally begun to improve after disappointing sales in the first half of the year. Political tensions flared up between China and Japan over claims on the disputed islands (known as Diaoyu in China and Senkaku in Japan), beginning from September 2012. This impacted the sales of Japanese companies negatively and it took a few months before sales normalized. Honda had stepped up its operations in the country by launching a new R&D center in Guagnzhou, and launching China specific models such as the Crider and the Jade. Unit sales accelerated in the last quarter of 2013 with total sales for the year up 26% to 756,882 vehicles. [1] China accounts for more than a sixth of Honda’s global deliveries.
In Japan, Honda’s sales have accelerated after the introduction of the latest version of the Fit (or Jazz as it is known in some countries). The automaker introduced the third generation Fit during the second quarter and received a staggering 62,000 orders within four weeks of its launch, almost four times the company’s expectations. Honda’s sales in Japan were up 48.9% and 47.6% in October and November respectively. [2] Overall, Honda’s global sales have been solid during the quarter. Strong sales and a weak yen should see the company beat its profit guidance.
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Notes:- Toyota to Honda Deliver Record Sales in China as Backlash Fade, January 6, 2014, bloomberg.com [↩]
- Honda Investor Relations [↩]