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Investment Overview for Honda (NYSE:HMC)
Honda is the world’s eighth largest automaker and the largest motorcycle producer based on 2015 sales. In addition to producing Honda branded vehicles (cars, vans, SUVs, trucks) and motorcycles, the company is also a leading producer of powersport vehicles (ATVs, watercrafts) as well as other motor-based products (generators, pumps). Honda also provides financing in the form of leases and loans for its products. Honda's financing business is a significant contributor to the company's profits. Honda is headquartered in Tokyo, Japan.
Honda's North America Vehicle Market Share:The U.S. automotive market showed strong signs of resilience in 2011 and registered a 10% growth in vehicle sales to reach approximately 13 million. In 2012, the momentum continued as 14.5 million vehicles were sold during the year. The U.S. automotive industry continued its show of strong growth in 2013, 2014 and 2015 as well, growing at a rate of 7.9%, 6.1% and 5.4%, respectively. The same trend is expected to continue in 2016, although the rate of growth is expected to slowdown further. The robust sales growth could translate into better revenue realization for Honda in the U.S., which is one of the biggest markets for the company. Going forward, the growth in the U.S. automotive industry will be the most decisive factor for the company in maintaining top line growth. Currently, we forecast Honda's market share in North America to remain nearly constant for the rest of our review period. If the same increases by 30 basis points. On the other hand if the market share declines by 30 basis points every year, there will be a 10% downside in our valuation for the company.
Honda's International Vehicle Market Share: According to statistics and analysis of the China Association of Automobile Manufacturers (CAAM), China could register automobile sales of approximately 30 million in 2020, an increase of close to 25% from the 24 million in 2015. With a penetration of only 87 cars per 1,000 people in China, there is definitely an enormous opportunity to be tapped in the country. The surge in demand in the Chinese automotive market presents a huge opportunity for the company and it might become a crucial factor in the revival of Honda's lost market share in recent times. Europe has been going through the toughest time since the adoption of a single currency in 1999, and the crisis that started from Greece has spread through other peripheral countries as well. Auto sales in the continent are now improving after having fallen for seven consecutive years. According to the Brussels-based European Automobiles Manufacturers' Association, registrations for new vehicles increased for the first time in seven years, in 2014. Despite this, many automakers, like Ford, Nissan, and GM, have reduced capacity in Europe in order to keep a check on their profitability in the region. Currently, we forecast, Honda's market share in the International Car market to grow by 10 basis points each year. Instead if it grows by 30 basis points, there could be an upside of more than 10% to our market price. On the other hand, a 10 basis point decline per year could push Honda's target price down by approximately 10%.
International vehicle market is 4x larger than North America vehicle market
In 2015, auto sales in the U.S. amounted to 17.5 million according to a recent report by J.D. Power and Associates. In comparison, there were close to 4x as many vehicle sales (67.4 million) internationally, including Japan.
High gross margins for automobile business
We estimate that Honda's motorcycle business had gross margins of 36% in 2015, a much higher figure than usual for auto companies, which usually report margins in the region of around 18%-20%.
Honda is promoting low cost hybrids
With oil prices bound to increase in the long term, fuel efficiency and environmental concerns will likely remain of long term importance to car buyers. Although Honda was the first company to commercially sell hybrid vehicles in the United States (the Honda Insight), the company quickly fell behind Toyota in sales for alternative fuel vehicles. Over the last decade, Toyota, with the success of Prius, has sold considerably more hybrids than Honda. In response, Honda announced an effort to regain its preeminence in the hybrid sector by launching a series of low-cost hybrid models that will be priced to reduce the considerable premium hybrid buyers currently pay for hybrid technology. Honda's new hybrid models will reduce this premium from $1,000 to $2,000 per vehicle, in a bid to recapture buyers from Toyota.
The Honda FCX Clarity is a hydrogen powered car with twice the efficiency of traditional gas and electric hybrid vehicles, and doesn't emit greenhouse gases. Honda is looking for a way to compete in an auto market that is increasingly focused on green technology. With the Clarity, Honda may find itself back in the game. In 2010, approximately 200 FCX Clarity vehicles were sold worldwide because there aren't too many hydrogen fueling stations around. Honda plans on producing fuel-cell vehicles on a mass scale in the future.
As Japan continues to grow, the demand for luxury vehicles will rise
About 15% of Honda's sales are concentrated in Japan, where the population is aging: 10% of the population was 65 or older in 1990, and by 2007 that number had doubled. Aging populations tend to save less and spend more on luxury items. In addition, much of Honda's production takes place in Japan, which provides generous national health insurance. Although Honda has to pay for some of its Japanese employees' insurance in the form of higher taxes, American automakers pay for the entirety of their employees' insurance. This has become a competitive advantage to non-U.S. automakers, which have much less of a health insurance burden.
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How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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