- Automobiles constitute 29% of the Trefis price estimate for Honda's stock.
- Vehicle Leases & Loans constitute 10% of the Trefis price estimate for Honda's stock.
- Motorcycles constitute 6% of the Trefis price estimate for Honda's stock.
WHAT HAS CHANGED?
- Impact of coronavirus outbreak
Honda's stock has suffered as states and countries are on lockdown. As industries have halted production and services, the demand for automobiles has taken a hit with consumers focusing solely on essentials and not discretionary products. Further, the company has had to shut down its plants, which has led to further declines in its stock. Q1 saw high fall in sales volume across segments while Q2 2021 (ended Sept 2020) had slightly smaller fall due to ease in lockdown restrictions. Q3 saw positive volume growth in certain segments because of vaccine rollout and easing of restrictions.
- Latest Earnings
Honda's Revenue in Q3 2021 (ended Dec 2020) was reported as $36.3 billion, up 6% y-o-y. The earnings rose to $1.59 from $0.61 in the same period of the previous year. Sales volume rose for Motorcycles segment where volumes fell to 4,269K units for the quarter, down 15% y-o-y. Automobile segment recorded a volume of 1,380K units for the quarter up 10.7% y-o-y and life creation segment (formerly power products) rose by 17% y-o-y to 1,402K units in the year.
- Navigating A Tough Industry Environment Through A Better Model-Mix
As Honda faces a challenging industry environment in the U.S. with consumer preferences shifting toward SUVs and crossovers (leading to a decline in the sale of its sedan models) Consequently, the company recorded a record sales in light trucks in the calendar year 2018 of models such as CR-V, Pilot, and Acura RDX.
- Motorcycle Sales In Asia Remain Strong
Honda Motors has seen strong motorcycle sales in Asia in 2018 and 2019, and based on these results, the company expects strong sales in the fiscal year 2020 too.
- Focus On Electric Vehicles
Honda Motors is taking concrete steps to develop strong capabilities in the electric vehicles space. In July 2017, the company entered into a joint venture with Hitachi Automotive Systems for electric vehicle motors. In May, the company initiated a joint research project with Boston University focusing on information security for artificial intelligence. Honda Motors also established a research project related to artificial intelligence with Kyoto University. In Q3 2018, the company launched PCX Electric (Electric scooter) in Japan.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Honda's Automobile Units Sold: Honda has a strong position in the world's second-biggest auto market. It had launched new models in the U.S. to meet the industry challenges of decline in passenger car sales. We expect automobile units sold to increase steadily hereafter. However, if the pace of increase is slower, there can be a downside to our price estimate.
Honda is one of the world’s ten largest automakers and the largest motorcycle producer based on 2017 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.
SOURCES OF VALUE
High gross margins for automobile business
According to our estimates, Honda's gross margin for its vehicle business is around 19%. We expect this number to remain steady over our forecast period.
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 sell hybrid vehicles in the United States commercially (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.