Here’s What Will Drive Growth In Honda Motors

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Honda Motor

Key growth drivers for Honda Motors (NYSE:HMC) include demand for luxury cars in Japan and North America, growing demand for green vehicles, and improving penetration in the motorcycle market, especially in China, India and Indonesia. We believe the company’s innovation in making fuel efficient, environmentally friendly and low cost hybrid vehicles should increase its market share in this growing segment. The launch of new models in the entry level luxury automotive market is another driver which can fuel growth in Japan and North America. The motorcycle segment holds tremendous growth potential and with a high global market share, Honda is well poised to leverage its leading position and increase penetration in this segment, driving future growth.

Innovation Towards Low Cost Hybrid Vehicles In The U.S.

In 2015 Honda launched the CRZ sports hybrid model, its Civic model fueled with natural gas, a hybrid Civic model and Accord Hybrid. All these models are priced at less than $30,000. These new launches are aimed at providing low cost fuel efficient and environmentally friendly cars to the U.S. market, and we believe that this focus on green technology is Honda’s way of competing in the auto industry. While Honda was the first company to commercially sell hybrid vehicles in the U.S., over the last decade its sales in this segment have been surpassed by Toyota. The global market for Hybrid Electric Vehicles (HEV) is expected to grow at a moderate pace over the next few years, reaching nearly 4 million vehicles by 2023. The success of Honda’s models in this space should enable it to capture additional market share in this segment from Toyota, and we believe this segment will be the key growth driver for Honda Motors.

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Increase In Demand Of Luxury Cars

Japan accounts for nearly 15% of Honda’s revenues and, given the demographic profile of the region, we believe sales in the luxury segment will drive the company’s growth in this region. Similarly, in the U.S., the luxury car market is expected to grow by 10% in 2015 on falling oil prices. North America is the largest market for Honda in terms of revenues and its new launches in the entry level luxury cars segment will be its key sales drivers in the region. The company recorded a 11% increase in sales in North America in Q2 2015 which was mainly due to an increase in sales of  HR-V model and compact SUVs. We believe that the entry level luxury cars market will be a key driver of growth for Honda in the future.

Retaining 40% Share In The Global Motorcycle Market

We estimate the Motorcycles, ATVs and Water Motors division to account for nearly 17% of Honda’s valuation.  The company’s market share in the global motorcycle market increased from nearly 30% in 2011 to approximately 40% in 2014, and we expect it to maintain this market share over our forecast period.

According to research firm Freedonia, two wheeler sales are expected to grow 5.9% annually to reach 135.2 million unit sales by 2018, driven primarily by growth in China, India and Indonesia. Honda’s penetration rate in India is 25% compared to 80% in Brazil, indicating the growth potential. We believe as the company expands into various countries and achieves higher penetration, this segment would see tremendous growth in the future.

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