Honda Earnings Preview: Strong North America Performance Likely Offset By FX Headwinds

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Honda Motor

Honda Motors (NYSE:HMC) is scheduled to announce its earnings for the first quarter of the fiscal year 2017 on Tuesday, August 2nd. In the previous fiscal year, the company posted a loss on the expansion of recall related costs. Even though revenue grew by close to 5% on a year-over-year basis, earnings per share (EPS) declined by close to 25%, on the combined impact of an 80 basis point contraction in operating margin and a 9% reduction in the value of the Japanese yen compared to the U.S. dollar.

In this quarter, we expect decent North America performance to boost Honda’s profitability with the declining value of emerging market currencies offsetting some of the gains. Higher value of the yen should also offset some of the North American gains as the value of the yen has already increased by 20%, more than Honda’s projection of a 12.5% gain for the currency.

Strong North America Performance

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Traditionally, Honda’s strongest segment has been the U.S. passenger cars market, in which it has been one of the leaders. However, in the first eight months of the year 2015, sales of both Civic and Accord declined as the passenger car market declined. Discounts on clearance sales as Honda prepared for the launch of a newer version of these models boosted sales towards the end of the year.

The positive thing for the company was that automotive sales had grown by over 11% in the fiscal year 2016. (Fiscal years end with March.) The same trend has continued into fiscal 2017, with Honda Motor Group sales up 5.2% year over year in the first half of 2016. In the April-June period, most of Honda’s growth came in the month of April, in which sales grew by 14.4% year over year, while in May sales declined by 4.8% and in June sales increase by 3.2%. The April sales bump was largely the result of a new version of the flagship Honda sedan Civic experiencing a 24.5% growth in sales. Strong sales of the Honda Accord, Odyssey minivan and Honda Pilot also contributed. Newer models usually command higher transaction prices so the April bump is likely to have been extremely profitable for the company. In 2016, the most significant trend for the company has been the increasing contribution of Honda CR-V, Odyssey Minivan and Honda Pilot as a percentage of overall car sales. Sales of all three models have increase year over year with Pilot sales growing by 19%.

Acura Sales Falling

Luxury sales, despite contributing only 10% of the overall unit sales in the U.S. car market, contribute nearly 20% of the revenue and 50% of the profits owing to their higher unit pricing. Consequently, it is extremely important for auto companies to increase their luxury sales. Honda has been trying to increase the sales of its premium car brand Acura. In 2016, however, sales of brands of almost all companies have declined, with sales of BMW down 9%, Lexus down 5% and Cadillac down 9.5%. Acura sales have declined close to 7%.

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