Why Is No One Talking About Honda?

by Investing Daily
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Submitted by Investing Daily as part of our contributors program.

U.S. new car sales rose sharply in August, according to two leading industry sources. And there’s reason to believe that the big jump could be the start of a longer-term cycle.

According to leading auto industry research firm Edmunds, August car sales jumped 20% from the same month a year ago, to 1.29 million vehicles. Sales were also up 12% from July. Japanese companies led the way, with sales at Honda (NYSE: HMC) soaring 61%, followed by Toyota (NYSE: TM), which saw its sales rise 42%, and Nissan (Other OTC: NSANY.PK), where sales jumped 13%.

The Detroit Three saw more modest gains, with sales at Chrysler rising 12% on the month, Ford (NYSE: F) increasing by 9.8% and General Motors (NYSE: GM) seeing a 6.4% rise.

TrueCar.com largely backed up Edmunds’ findings, showing a 17% increase in U.S. car sales in August.

“Sales showed signs of flattening out in the first couple months of summer, so August’s sales figures will come as a nice surprise for everyone in the auto industry,” said Edmunds’ senior analyst Jessica Caldwell.

Many Old Clunkers are Nearing the End of The Road

One factor driving new car sales is the sheer age of the country’s current vehicle fleet. According to R.L. Polk and Co., the average U.S. car was 10.8 years old in 2011—an all-time high. That mainly reflects the fact that Americans held off on new car purchases during the recession.

Instead of trading up, drivers have been doing all they can to keep their old rides on the road. This is the main reason why auto parts sellers like AutoZone (NYSE: AZO) have seen their sales soar in the past few years—while two of the Detroit Three carmakers were forced into Chapter 11 bankruptcy protection.

Still, you can only keep an old car going for so long before the mounting repair bills start to eat up any money you’re saving by holding out. When you combine that with greater incentives from carmakers—particularly as they look to clear out space for new 2013 models—and a continuing economic recovery, it looks like more and more shiny new vehicles will be driving off the nation’s car lots in the coming months.

High Gas Prices Give Small Cars Big-Time Appeal

As many U.S. cars head for the scrap heap, gas prices continue to rise: the average pump price in the U.S. was $3.83 a gallon on Friday, up $0.21 from a year ago. It also broke the Labor Day record of $3.68 a gallon.

That’s largely due to the impact of Hurricane Isaac, which closed refineries on the Gulf Coast. But consider that for the entire month of August, gas prices are up $0.31—or 9.2%—from August 2011.

Concerns about rising fuel prices, along with increased awareness of environmental issues like climate change, have prompted many consumers to switch to smaller, more fuel efficient vehicles. Ford, for example, recently said that its Focus compact is on track to become the world’s best-selling car, passing another long-time top seller in this space, the Toyota Corolla.

Reliability Is More Important Than Ever Before

Along with increased fuel efficiency, cost-conscious post-recession buyers are placing a higher-than-ever premium on longevity and reliability. That’s a place where Honda, in particular, really shines.

Two of the company’s cars, the Civic and the Accord, recently grabbed the number two and three spots on AutoGuide.com’s list of the top 10 most reliable family cars. “This list would probably have no credibility if the Honda Civic didn’t appear on it,” said AutoGuide. “For decades now, the Civic has become synonymous with reliability and dependability, not to mention affordability.”

Further bolstering the Civic’s image is the fact that it was also recently named the most reliable used car in the U.K. based on a survey by What Car? magazine and Warranty Direct. It was the seventh straight year that the Civic won the title. “Reliability is so important to motorists, especially when times are tough,” said Chas Hallett, the magazine’s editor-in-chief. “Honda is exceptionally good at this.”

Honda Is Rebounding Quickly From Last Year’s Natural Disasters

The company had a rough 2011. First the Japanese earthquake/tsunami/nuclear meltdown in March shuttered a number of its factories, then flooding in Thailand caused parts shortages that weighed on its sales. The low year-earlier numbers were one of the reasons why it has seen such big sales increases so far this year.

In its latest fiscal quarter, which ended June 30, 3012, Honda’s overall sales surged 42.1%, to 2.44 trillion yen, or $30.7 billion. The company saw strong gains in all of its regions except for two: Europe, where sales fell 2.0%, and South America, the Middle East, Africa and Asia, where revenue declined a combined 4.2%. Both setbacks were largely due to the negative impact of foreign exchange rates.

Net profits jumped 314.3% from the year-ago quarter, to 131.7 billion yen, or $1.7 billion.

The continued strength of the Japanese yen is a drawback to investing in Honda, because it continues to reduce the value of the company’s overseas sales (In the last quarter, 82% of Honda’s revenue came from outside Japan). Still, the company continues to forecast a $6-billion profit for its fiscal year ending March 2013, more than double its earnings in the previous year. It also expects to sell 4.3 million vehicles in the current year, up 38.4%, with North America supplying 40% of the total.

The company also benefits from its diversified business, which sets it apart from many other automakers: in addition to cars, it makes motorcycles and power equipment, such as lawn mowers, snow blowers and generators. The motorcycle business is an ongoing bright spot for Honda: in the latest quarter, it sold 2.4 million units, up 21.4% from a year ago.

To top it off, Honda pays an attractive dividend compared to many other automotive stocks: Quarterly payments of 19 yen per share ($0.24 U.S.) yield 2.5%. Honda isn’t the only company paying an attractive dividend in this market. Check out The Top 5 Companies that Pay Dividends for more low-risk picks that pay dividends above 5%.

Article originally posted here.

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