A Closer Look At The Automotive Landscape: Is Honda Doing Better Than Toyota?

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DAIMLER AG

As the automotive industry undergoes a transformation as consumers move away from car ownership to ride sharing, we look closely at five auto companies to see where they stand in terms of future profitability and growth. We compared Toyota Motors  (NYSE:TM),  Ford Motor Company (NYSE: F),  Daimler AG (OTC: DDAIF),  General Motors (NYSE:GM),  and Honda Motor (NYSE: HMC) for this analysis.

Toyota is the largest automaker in the world, well poised for sustained revenue growth through 2020. The company recently accelerated its electric vehicles strategy to ensure that it remains ahead of the competition as emission norms become stricter and demand for electric vehicles increases. (Read Here’s Why Toyota Motors Is Accelerating Its Electric Vehicles Strategy). The chart below shows our revenue estimates and the revenue growth CAGR (compounded annual growth rate) estimates for these five automakers from 2017 till 2020.

Auto Revenue R

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Rev Gr

While Toyota Motors is likely to maintain its lead in terms of absolute revenues, we expect Daimler AG to register a higher CAGR (compounded annual growth rate) with nearly 5% growth compared to the 4% number for Toyota.  The company’s luxury division has shown solid results in the last year and this segment is a key value driver for Daimler. (Read Mercedes’ Strong SUV Lineup Is Helping It Weather The Storm In The U.S. Automotive Market). Other companies such as General Motors and Ford Motors are likely to witness a slower growth rate in the range of 2-3%. Honda Motors is likely to grow revenues at 4%, very close to Toyota’s growth rate.

The margin trends show that Honda Motors’ gross margin is very close to Toyota Motors and the company is likely to surpass Toyota’s net margins in the next few years.

Auto GrossMgn R

Honda and Toyota enjoy the highest gross margins in this peer group, with players such as General Motors at a significantly lower mark.  While we expect Toyota’s net margins to decline over our forecast period, we expect Honda to significantly increase its net margins over the next four years.

Auto NetMgn R

We expect Honda Motors to perform better than the other auto companies in terms of net margins. Its revenue growth is expected to be closer to Toyota’s growth number at around 4%. Both these companies are likely to spend around 6% of their revenues on capital expenditure over the next four years. Ford is likely to invest more with capex as a percentage of revenue reaching nearly 7% by 2020.

Auto CapexR

While Toyota would continue to remain the industry leader in EPS, Honda Motors is likely to increase its EPS over the next few years.

EPS

Our expectation is that Honda Motors will be able to increase its margins and continue to register a growth in its EPS. However, we believe that the market has already incorporated this future growth in Honda’s stock price and a further upside to its price is less likely. Our price estimate for Honda is very close to its current market price. If the company is unable to meet the expected growth in revenues and profitability, there could be a downside to our price estimate.

Ford Motors, on the other hand, is likely to underperform compared to its peers with a slow revenue growth and declining net margins which will be significantly lower than its peers. This is primarily due to high capital expenditure in the next few years, after which the company should be able to improve its profitability.  After factoring this slow growth and decline in margins, our price estimate for Ford is higher than its current market price, implying the market may currently be too pessimistic on the company’s prospects. If Ford is able to beat these expectations and improve its revenues and profitability in the next few years through its Ford Mobility initiatives, there can be upside to its market price.PE new

 

As we look at the automotive landscape through our magnifying glass, it appears that Toyota Motors remains the industry leader with strong growth prospects. Honda‘s current market price has factored in significant growth in the future, which if not achieved might lead to a decline in its valuation. Ford might be the dark horse which could spring a surprise in the future.

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