Honda Earnings: A Weak Yen And Panic Purchases Double Honda’s Profitability

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A weak yen and a last minute rush to purchase cars before the new sales tax came into effect in Japan, propelled Honda Motors‘ (NYSE:HMC) profits to $1.67 billion, a 125% increase on last year’s $0.75 billion. Total revenues for the quarter jumped 12% to 3,097 billion yen ($30 billion) while operating income swelled 21% to 165.2 billion yen ($1.6 billion). The increase in operating income was driven by an increase in sales volume, a higher price model sales mix, continuing cost reduction efforts, as well as favorable foreign currency effects, despite increased SG&A and R&D expenses. [1]

The Japan based automaker sold roughly 1.2 million cars this quarter, up ~20% from just over 1 million a year ago. The company attributed this increase in sales volume to a surge in purchases made by people looking to beat the sales tax rise which came into effect on April 1. Honda now expects to sell 4.83 million vehicles globally for the fiscal year ending March 2015. It sold 4.3 million vehicles for the fiscal year ended March 2014.

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. For fiscal year 2014, Honda had earlier assumed an exchange rate of 97 yen to a dollar, but now expects an exchange rate of 100 yen to a dollar. Thus, the slight dip in unit sales guidance is likely to be compensated by a weaker yen.

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We have a $43 price estimate for Honda Motors, which is about 10% above the current market price. We are in the process of revising our estimates in order to incorporate the latest earnings.

Japanese Sales Soar While North America Could Improve

During the quarter, Honda’s sales jumped 41% in Japan, helped by the following two factors:

  • A number of people bought cars as they sought to beat an increase in the sales tax to 8% from 5%, which came into effect on April 1.
  • The introduction of new models and the launch of fully remodeled vehicles in the region: The Fit was also showcased at the Detroit Auto Show in January and will debut in North America this year. Another vehicle that was displayed was the Vezel, the automaker’s first crossover SUV. 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. [2]

North America is Honda’s biggest market and accounts for more than 40% of the unit sales. During the quarter, sales in the U.S. for the Japenese automaker declined as demand for the Accord sedan, its best-selling vehicle declined and demand for its popular Odyssey minivan was almost flat. A bright spot for the company over the quarter was that despite many of its competitors offering several incentives like discounts and special offers for customers to shell out on vehicles in spite of the bad weather, the company’s market share in the region remained strong. [3]

Chinese Sales Rebound

After a difficult 12-15 month period starting September 2012, Honda is once again optimistic about China. Sales of Japanese automakers had tanked due to a wave of anti-Japan sentiment present across the general public, because of political tensions between the two countries. As the sentiment gradually improved and Honda introduced two China-specific models, namely the Jade and the Crider, the automaker’s sales accelerated in the second half of the year. During the quarter ending March, Honda’s sales more than doubled on a year-over-year basis.

Furthermore, Honda plans to introduce nine more models within the next two years as it aims to gain back market share from its American and German rivals. Earlier in 2013, Honda even set up an R&D center in the world’s most populous nation to develop China-specific models. In 2014, Honda is targeting sales of 900,000 units or 19% more than those sold in 2013. Overall, the Chinese automotive market continues to grow at an impressive rate. After crossing 22 million units in 2013, the Chinese automotive market is expected to rise more than 10% in 2014. [2]

See our complete analysis for Honda stock here

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Notes:
  1. Honda Motors Investor Relations []
  2. Honda’s new crossover launches in Japan, headed for US in 2014, hindustantimes.com [] []
  3. Here Are The March 2014 ‘Big 8’ Auto Sales Numbers, IBTimes, April 2014 []