Earnings Preview: Honda Ended 2016 On A Really Strong Note
Honda Motor Co. (NYSE: HMC) is set to report earnings for the third quarter of fiscal year 2017 on Friday, February 3rd. The Japanese auto maker has had a strong October-December period and this should be reflected in the numbers that it reveals on Friday. In the previous quarter, the company saw its unit sales grow by 6.3% compared to sales in the same period in 2015. As a result of this, the auto maker saw its revenue increase by 6.2%. Honda’s automotive unit sales performance varied quite significantly in the three geographies—Japan, North America and International regions. While sales in the latter grew by close to 14%, North America sales only grew by 2% and sales in Japan declined by 4.1%. This variance in performance by geography reflects the economic situation in these markets, as well as the stage of the automotive market life cycle that they are currently in.
North America is a highly saturated car market with limited potential for growth. The growth in the overall market that happened over the past few years was largely an artifact of the pent up demand from the 2008-2011 period when new vehicle purchases had slowed. Moreover, the growth has been concentrated in specific segments—Crossovers, large SUVs and premium SUVs. Honda’s strength in this market has traditionally been its sedans, the Civic and Accord. In 2016, the Civic did extremely well despite the weakness of the passenger car market, with its sales growing by 9.4% even as the passenger car sales declined by 8% overall. However, Honda’s sales gains over the past year in the North American car market have been a product of two things: First, the company hasn’t pursued the strategy of flooding each market segment with models in search of volume and market share. Instead, it has concentrated on product quality and customer targeting. Second, it has introduced models in strong performing segments. Indeed, light truck sales for Honda increased by 27% in 2016. Moreover, even the Honda segment that struggled in 2016- SUVs- was largely a result of production constraints. The company has already taken moves to remedy these problems.
In contrast to North America, the Japanese auto market has been weak for a while now. Japan has an ageing population and new car sales have declined for a few years now. Honda has seen its sales decline in the country over the past few quarters. However, the appreciation in the value of the Yen compared to the dollar means that these new sales translate into higher numbers in dollar terms. The international market is composed of a number of different markets in different stages of the automotive life cycle. Western Europe is mature, and China is rapidly growing, Eastern Europe, India, Brazil and Indonesia represent tremendous potential for growth. Honda’s strength in product quality and marketing has seen it take a strong position in most of these markets and as a result the company is expected to post close to double digit growth in this segment for the coming few years. This means that the company’s strong performance in North America, the strength of the Yen and the growth in international markets should translate into higher profits for the company.
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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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