Earnings Preview: Strong Trucks, Acura Performance Should Boost Honda’s Profits
Honda Motors (NYSE:HMC) is scheduled to announce its earnings for the second quarter of the fiscal year 2016 on Thursday, November 5th. The Japanese auto maker is undertaking a significant strategy shift this year. Earlier this year, the company changed its senior management and decided to change strategy. Under the stewardship of previous CEO Takanobu Ito, the company had expanded its capital expenditures as it looked to grow its unit sales. However, declining sales of many models and the Takata airbag recall incident led the company to stop that strategy and change tack. Ito was replaced with Takahiro Hachigo , who decided to cut the total model count by 20% and focus on overall quality. Sales had fallen by 5% over the first two months of the year but in the first quarter of fiscal 2016, global sales grew by 4.9%, driven by a 11% in North America and 30% growth in China. Below, we take a look at what we expect from the company in the third quarter.
We have a $38 price estimate for Honda Motors, which is 15% above the current market price.
Strong North America Performance
North America accounts for more than 40% of Honda’s unit sales, making it the company’s biggest market. Honda’s U.S. sales performance is usually driven by strong sales of Accord and Civic, its two popular sedans. However, in 2015 sedan sales have stalled as consumers have preferred SUVs, crossovers and pick-ups over them, spurred by low gas prices. This has been reflected in Honda’s performance this year. Sales of the Accord fell by close to 15% for the first eight months of the year on a year-over-year basis. Sales of the Civic were down by 6% for the same period, while the Fit was down by a massive 30%. [1]
That trend reversed in September as sales of Civic grew by a strong 27%. [2] This gain is likely a one-off result of high incentives offered by dealerships as they looked to clear out their inventories in anticipation of the launch of the 2016 version of the Civic. The 2.1% gain in sales of Accord might also be attributable to the same factor. [2] The company is set to launch a new version of the Accord soon. The 2016 Accord won’t be entirely new but there are a number of new features in the 2016 model, such as a new grill and many changes to the structure and suspension.
Overall , Honda’s unit sales in the U.S. rose by 13% in the month of September. The growth was driven by sales of Honda’s crossover SUV and minivan. Sales of Honda and Acura trucks grew by close to 27% on a year-over-year basis in the month of September. Growth wise, Honda’s crossover SUV CR-V has outpaced Accord sales so far this year and the trend nearly continued in September too, with a 26% year-over-year gain. [2] Sales of the bigger Pilot SUV grew by 31%, while sales of Acura’s crossover RDX grew by 19%. [2]
Acura Has Been A Bright Spot
While Accord and Civic sales might have increased only as a result of clearance sales, Honda’s luxury brand Acura is bucking the sedan sales trend in 2015. Acura sells three sedans in the U.S. — ILX, TLX and RLX. The ILX is mostly targeted at younger customers and sells for under $30,000 despite offering features such as a powerful 2.4 liter engine and eight-speed transmission. The ILX competes in the market with the Audi A3, Lexus CT and Buick Verano. In the first eight months of the year, ILX sales have grown by a modest 3%. [2] Acura introduced the TLX to the U.S. market in the middle of last year. The mid-size luxury sedan sold close to 20,000 units in the five months it was on sale last year, but sales through August reached 34,000. The 2016 version of the sedan reached dealerships in September and that should help boost sales further. Strong Acura sales should help raise the company’s bottom line as luxury vehicles command higher margins.
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