Honda Motors Corp Earnings Preview: Weak Yen Should Offset Lower Unit Sales in North America And China
Honda Motors (NYSE:HMC) is scheduled to announce its Q4 earnings on April 24. During the Q2 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 20% above the current market price.
Honda 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 the tapering of its Quantitative Easing program. Japan reported a 1.2% year-on-year rise in inflation in November, a five year high. Following the release of manufacturing and industrial output data in January, the yen fell to a five year low of 104.93 against the dollar. [1]Thus, it is likely that Honda will beat 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 Could Suffer
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, spending on automotives suffered in the winter due to extreme weather conditions. Data showed that there was a high correlation between poor spending on automotives and areas with extreme cold over the turn of the year. [2] However, the drop in sales might be offset due to the introduction of Honda’s new car, the 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.
However, the company has been unable to ride the wave of recovery in the automarket in Europe. Sales of cars have recovered from a six year slump in Europe, with a 7.2% increase in the first quarter of 2014 to 3.1 million from 2.9 million in the same period of 2013. Honda’s sales, in comparison, have suffered as its range of CR-V SUVs and Civic small cars have proven too expensive and unpopular in the region. [3]
In China, sales have slowed after encouraging signs in the first two months of the year. Japanese car companies have been trying to regain market share after 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 had grown by 31% in the first two months of the year but growth fell to 2% in March. [4] 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 production for Japan grew by ~54% for the month of March. [5] 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.
See our complete analysis for Honda stock here
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- Japan Inflation At Five Year High, CNBC, December 2013 [↩]
- Weaking Economy or Just Bad Winter, House of Debt, March 2014 [↩]
- Europe Car Sales Boom But Honda Trips Over Lame Product Lineup, Forbes, April 2014 [↩]
- Japanese Car Companies Post Slower Growth in China Sales, April, 2014, Wall Street Journal [↩]
- Japanese Automarkers Full Year Production Rises, Nasdaq, April 2014 [↩]