Weekly Notes:Honda Benefits From Shifting Trend Toward SUVs, Crossovers and Fuel-Efficient Vehicles

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U.S. light vehicles rose by 6% in the month of October compared to October, 2013. However, the more striking data point to emerge from the October auto sales was that consumer spending rose by 8% in the month, according to figures reported by J.D. Power. [1] The rise in revenue outpaced the gains made in volumes as consumers have been shifting from lower priced sedans to expensive SUVs and crossovers. For the first ten months of the year,  total consumer spending on new vehicles was $334 billion, putting the figure on course to surpass $400 billion for the first time ever. [1] Even though, total vehicle unit sales are still lower than those five years ago or before the recession, and even compared to ten years ago, a trend towards larger and more expensive cars is driving the auto market.

Lower gasoline prices can provide a further boost to the auto market in the U.S., as consumers move trade in their older, fuel-inefficient cars for more expensive, fuel-efficient vehicles in order to lower their overall cost of owning a vehicle- lower fuel costs should mean that over a long period, the amount of money spent on the operation and maintenance of a car comes down. The price of gasoline fell below the $3 mark for the first time since 2010 last week. [1]

Honda Motors (NYSE:HMC) is one of the companies that seems to be profiting the most from this trend. In the month of October, Honda, along with Fiat Chrysler, contributed nearly 41% of the total gains made in overall revenues made by the auto industry. For Honda’s America division, the CR-V was the highest selling vehicle for the first time in over two years. The company delivered over 5,100 more CR-Vs than Civics in the month of October. The average price of a CR-V is 25,729 compared to Civic’s 19,597, therefore the higher presence of CR-V in its overall sales mix should boost the company’s margin. [1]

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We estimate gross revenues of about $127.3 billion for Honda Motors in 2014, with EPS of $4.00, which is slightly higher than the market consensus of $2.23-3.09, compiled by Thomson Reuters. We currently have a $43 price estimate for Honda Motors, which is approximately 30% ahead of the current market price.

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Notes:
  1. Sales are up and the mix is rich, Automotive News, November 2014 [] [] [] []