Exploding Recall Costs Result In 22% Profit Decline For Honda in Fiscal Q3 Results

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Honda Motor

Honda Motors (NYSE:HMC) announced its earnings for the third quarter of fiscal year 2016 on Friday, January 29th. (Fisacal years end with March.) The company reported a 24% decline in pre-tax profits compared to the prior year, due to increased SG&A expenses, added quality-related costs, and negative foreign currency effects. This is so despite an increase in sales volume and a favorable sales mix. Total revenues for the quarter increased by just over 3%, but operating profit fell by 22.3%. For the first nine months of the year, sales grew by 11.3%, but operating profit declined by 3% resulting in a 0.6% decline in pre-tax profits.

The Japanese auto maker forecast a slight 0.2% decline in pre-tax profit for the full fiscal year 2016, stating that gains from volume growth would most likely be offset by higher quality related costs and currency losses. [1]  That said, the company reported the negative impact of the economic situation in Japan and weaker than expected sales in the U.S.

We have a $38 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


North America Sales Sluggish

North America is Honda’s biggest market and it accounts for more than two-fifth of the unit sales. During the quarter, sales in the U.S. for the Japanese automaker declined by 1.7%. [2] In the month of December, Honda’s sales in the U.S. increased by 9.9%, but that included a 5.5% decline in the sales of its luxury brand Acura. [3] However, this performance came on the heels of a dismal November, when Honda did not raise incentives compared to other auto makers and suffered a 5% year-over-year decline in sales, including a 17% decline in Acura sales. [4]

Compared to fellow Japanese auto makers Toyota and Nissan, Honda kept its incentives low in November, as it launched new versions of its two best selling vehicles Accord and Civic. Both vehicles experienced significant increases in sales in the month of December, with Accord sales growing by 11% and Civic sales growing by 29.4% on a year-over-year basis. [4] Moreover, when introducing new models auto makers tend to keep inventory levels lower so as to squeeze out higher than usual transaction prices. Despite this, the company could not really raise its profitability as ballooning costs from the Takata airbag crisis and incremental expenditures on quality control ate into the company’s margins. Honda has had to recall around 24 million vehicles to fix the defects in vehicles that were equipped with the faulty airbags. The company kept full year forecasts for North America unchanged despite the sales decline in the third quarter.

China Boosts Asia Sales

In the third quarter, Honda’s auto mobile unit reported sales declines in each of the geography it operates in except for Europe and Asia. In Asia, the company was helped by strong sales in China, where the introduction of the sedan Honda Greiz, a redesigned Honda City, and strong performance of the SUV XR-V and the crossover Vezel boosted overall unit sales. [2] Overall unit sales in Asia grew by 17% for the quarter. [2]  The company also reported a 19% increase in unit sales in Europe for the quarter. [2] Going forward, we expect sales in both these geographies to remain strong.

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Notes:
  1. Honda Motors Q3 Presentation,Honda Investor Relations) The company also revised its sales target for the year by small 0.1%, raising it to 4.73 million. The Japan-based automaker has sold roughly 3.5 million cars in the year so far, slightly higher than last year’s 3.3 million over the same period. ((Ref: 1 []
  2. Ref: 1 [] [] [] []
  3. 2015 Year End U.S. Passenger Car Sales Rankings – Top 160 Best-Selling Cars In America – Every Car Ranked , GoodCarBadCar, January 2016 []
  4. Ref: 2 [] []