Earnings Review: Honda Downgrades FY 2015 Forecasts Due To Challenging Market Environment In US, Japan

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Honda Motor

Honda Motors (NYSE:HMC) announced its earnings for the second quarter of fiscal 2015 on October 28. The company reported a 17.9% gain in net income on the back of high automotive sales in Europe and Asia (excluding Japan). Total revenues for the quarter jumped 4% to 3,000.2 billion yen ($27.8 billion) while operating income declined by 4.1% to  164.4 billion yen ($1.52 billion). The decrease in operating income was caused by a decrease in automobile unit sales in North America and Japan, and partially offset by the introduction of new car models in Asia and successful cost reduction efforts. [1]

The Japan based automaker sold roughly 1.07 million cars this quarter, up ~2% from just under 1.05 million a year ago. [2]  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 Asia. Following the results, Honda lowered its forecasts from 4.83 million vehicle sales for the fiscal year 2015 to 4.62 million citing challenging business environments in both North America and Asia. It sold 4.3 million vehicles for the fiscal year ended March 2014.

We have a $43 price estimate for Honda Motors, which is about 40% 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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See our complete analysis for Honda Motors


Sales in Japan and North America Decline

During the previous two quarter, Honda’s sales jumped 41% and 44% 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. The introduction of new models, like the N-WGN minicar and the Vezel subcompact, also contributed to the tremendous gain. [3]

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%.

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 but increased by 33% for the Accord sedan, its best-selling vehicle, on the back of incentives such as discounts and no-interest deals, which made the vehicle more attractive to owners of older models. Operating profit in North America declined 14% to ~39 billion yen($360 million), from 46 billion yen($420 million) in the previous year. [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. 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 Motors Q2 Financial Results Presentation []
  3. FY15Q1 Results, Honda Investor Relations []
  4. Consolidated Financial Summary for the Fiscal 2nd Quarter ended September 30, 2014, Honda  The company blamed the decline on increased incentives to move cars in the United States. Despite this decline, Honda kept its forecast of 1.8 million unit sales in North America for the fiscal year unchanged.

    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 had built up somewhat. As a result, it reduced manufacturing at its Wuhan plant by reducing the number of shifts from two per day to just one. ((UPDATE 2-Honda profit beats estimates but U.S. sales dented, Reuters, July 2014 []