Refreshed Product Lineup To Boost Honda’s North America Market Share

Honda Motors (NYSE:HMC) has invested nearly $3 billion in its U.S. operations over the last three years. As North America takes on greater importance in Honda’s business, a major investment was required in order to make improvements to the production processes in the company’s U.S. based factories. Earlier this year, Honda also opened a factory in Mexico, where it will produce its highly popular Fit hatchbacks, and a new small SUV. The plant will make 200,00 cars a year and take Honda’s North America production capacity to 1.92 million. ^[1]  Last year, the Japanese automaker produced a record 1.3 million vehicles in the U.S. and exported nearly 8% (108,705) of these. ^[2] In the future, the company expects the export figure to increase to 200,000 a year. Honda is not the only one Japanese automaker to undertake significant investment in its North American operations: Toyota is undertaking a $2 billion investment in order to add 145,000 vehicles to its annual production capacity and Nissan is moving the production of models like its SUV Murano to the U.S. ^[2]

The efforts to improve production capacity in the U.S. highlight the growing importance of this market to Japanese automakers. Following the fall in demand in U.S. and Europe brought about by the global recession, emerging markets grew in importance to these companies. Rising demand for vehicles in China, Southeast Asia and Latin America helped to offset the dip in U.S., European and Japanese sales. But during the past year, demand from the emerging markets has slowed as doubts over their growth prospects have emerged. The U.S. auto market, on the other hand rebounded sharply in 2011 and 2012, and continued on the same trajectory by recording a 7.9% growth in 2013. Moreover, spurred on by the depreciation of the yen against the dollar, Toyota, Nissan and Honda registered excellent sales volumes in the past two years.

See our complete analysis for Honda stock here

We have a $43 price estimate for Honda Motors, which is about 10% above the current market price.

Sales Expected To Pick Up

North America is Honda’s biggest market and accounts for more than 40% of the unit sales. During the previous 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]

Sales are expected to pick up later this year  with 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. ^[4]

Fresh Model Launches Can Help Boost Market Share

According to a Bank of America analysis reported by Bloomberg, Honda “may refresh or replace 28% of their annual sales volume” between 2015 and 2018, compared to the industry average rate of 23%. As the U.S. auto market recoverd, sales in May picked up 11% putting the market on pace to achieve a figure of 16.8 million unit sales on a seasonally adjusted basis as consumers flush with cheap credit are likely to be swayed by new car launches. Honda’s pipeline for the next three years includes the Acura TLX Sedan for 2015, the Pilot SUV for 2016 and the Odyssey minivan for 2017. The Bank of America report estimates that this line up will help raise Honda’s market share to 10.3% by 2017. ((Ford, Honda New Product-Cyle Should Woo Buyers-Report, Bloomberg, June 2014))

Assuming a market share of 10.3% in 2017 for Honda and keeping the average vehicle price and gross margin on its vehicles constant, the potential upside on our valuation is 2.5%. If the addition of two new SUV’s  to Honda’s product lineup in the region and the expected appreciation of the U.S. dollar due to the tapering of large scale asset purchases by the U.S. Federal Reserve can boost average vehicle pricing in North America by $1 K, the upside can increase to 3.4%. If the production of the Fit hatchback and Pilot SUV in Mexico can help improve Honda’s gross margin in North America by 1%, there could be a potential upside of 4.6%.

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1. Honda Expands North America Base With New Small Car Factory In Mexico, Forbes, February 2014 [↩]
2. Honda’s US Factories Hit Export Milestone, Wall Street Journal, January 2014 [↩] [↩]
3. Here Are The March 2014 ‘Big 8’ Auto Sales Numbers, IBTimes, April 2014 [↩]
4. Honda’s new crossover launches in Japan, headed for US in 2014, hindustantimes.com [↩]