Why Acura’s 2016 Performance Should Worry Honda

-12.84%
Downside
37.23
Market
32.45
Trefis
HMC: Honda Motor logo
HMC
Honda Motor

A very important fact to auto investors is the profitability of luxury cars. Despite making up only a tenth in sales volume, this segment contributes close to 20% of the annual revenue and close to half of the operating profit for the industry. The average unit pricing of a luxury car is somewhere close to $44,000, compared to just over $20,000 for the average price of vehicles overall. Given the high fixed cost of manufacturing and distributing a car, a higher purchase price is the biggest guarantor of profitability.

Honda Motor‘s  (NYSE: HMC) premium brand Acura is known for its high quality cars, but lags behind BMW, Mercedes-Benz and Lexus in terms of overall sales. In recent years, the brand has increased its number of models and as a result grown its sales and unit pricing. For Honda, it has been the second fastest growing division behind Honda’s North America operations over the last five years. However, in 2016, sales of the brand in the U.S., a market from which it gets close to two-thirds of its overall sales, have declined by over 9% on a year-to-date basis. If this trend persists over the next five years, it could cost the company over $15 billion in revenue and $4 to $5 billion in profits.

acura loss

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Honda Motor

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