Honda Posts Higher Earnings On Excellent Japan Sales, Cost Cuts

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HMC: Honda Motor logo
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Honda Motor

Honda Motors (NYSE:HMC) announced its earnings for the first quarter of fiscal 2015 on June 29. The company reported a 20% gain in earnings on the back of high automotive sales in China and Japan. Total revenues for the quarter jumped 5.4% to 2,988.2 billion yen ($29.482 billion) while operating income increased by 7.1% to 198 billion yen ($1.954 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, slightly offset by higher S,G&A expenses. [1]

The Japan based automaker sold roughly 1.061 million cars this quarter, up ~6% from just under 1 million a year ago. The company attributed this increase in sales volume to to the positive impact of new model introductions as well as the launch of fully remodeled vehicles in Japan and Asia. [2] Honda left the forecasts for 4.83 million vehicle sales for the fiscal year 2015 unchanged despite the higher sales this quarter. It sold 4.3 million vehicles for the fiscal year ended March 2014. [3]

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.

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Japanese Sales RiseWhile North America Declines

During the previous quarter, Honda’s sales jumped 41% in Japan, helped by the following two factors: 1) 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. and 2) The introduction of new models and the launch of fully remodeled vehicles, the Fit and Vezel subcompacts, in the region. In this quarter, however, the negative impact of the hike in sales tax was expected to come into effect as a sales tax hike should make people hesitant in purchasing new cars. Moreover, real wages in Japan have been falling over the previous quarter and the negative impact of this trend might also have been felt on Honda’s sales. ((Shinzo Abe faces rising disenchantment in Japan, Financial Times, July 2014)) However, the positive impact of the introduction of full remodeled versions of the Fit and Odyssey raised unit sales in China by as much as 44%. The introduction of new models, like the N-WGN minicar and the Vezel subcompact, also contributed to the tremendous gain. [3]

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 Japanese automaker stayed flat declined for the Accord sedan, its best-selling vehicle its popular Odyssey minivan was almost flat. One factor which had a significant impact on Honda’s sales in the continent was the halt in manufacturing at the company’s Mexico plant. The plant which manufactures the Fit subcompact had troubles maintaining production pace as it adopted new manufacturing techniques. Despite this, the company kept its full-year U.S. sales targets unchanged and said volumes would get back on track. [4] The company is counting on the Fit to grab market share from the Chevrolet Sonic hatchback and Ford Fiesta.

The company also cited the delay in the launch of the Acura’s new TLX sedan as another factor behind its sluggish performance in the United States for Q1. Honda’s average U.S. incentive per vehicle in the quarter was $1,941, up 11 % from last year’s first quarter and slightly higher than Toyota’s, but below Nissan’s. The company posted a 6% drop in operating profits for North America operations for the quarter. [4]

Chinese Sales Rebound

Since a difficult 12-15 month period starting September 2012, Honda has been 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. In China, Honda’s sales grew 11.7 percent year-on-year in the first six months of 2014, but the auto maker’s inventories have built up somewhat. [4] As a result, it has reduced manufacturing at its Wuhan plant by reducing the number of shifts from two per day to just one. [4]

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. In 2013, Honda even set up an R&D center in the world’s most populous nation to develop China-specific models. Honda expects to sell 900,000 vehicles in 2014 and double annual sales in China to 1.3 million units in the three years through 2015. [5] 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.

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Notes:
  1. Honda Motors Investor Relations []
  2. Honda Motor Co., Ltd. Reports Consolidated Financial Results For The Fiscal First Quarter Ended June 30, 2014, Seeking Alpha, July 2014 []
  3. FY15Q1 Results, Honda Investor Relations [] []
  4. UPDATE 2-Honda profit beats estimates but U.S. sales dented, Reuters, July 2014 [] [] [] []
  5. Honda profit rises 7 percent on cost cuts, Japan sales, Automotive News, July 2014 []