Earnings Review: Honda’s Strong Performance In North America Boosts Profitability
Honda Motor Co. (NYSE: HMC) reported earnings for the third quarter of the fiscal year 2017 on Friday, February 3rd. (Fiscal years end with March.) The Japanese auto maker saw its automobile sales grow by 6.8% in the October-December period compared to the same period in the previous year. The company increased new unit sales in Japan, North America and Asia (excluding Japan). However, this increase in unit sales only translated into a 3.7% decline in reported sales in Yen terms. But as the yen appreciated relative to the U.S. dollar, the revenue in dollar terms increased by 7.8%. Overall revenue in dollar terms increased by 8.3%.
Honda derives over 40% of its revenue from its North American operations. This is largely the result of higher average transaction prices in the U.S. auto market. The Japanese auto maker has strong performing vehicles in almost all market segments. It had the third highest selling sedan in Civic, whose sales grew by 9.4% in 2016 compared to the overall passenger market which declined by 8%. The company also had the highest selling SUV in the U.S. auto market in the CR-V, whose sales grew by 3.4% to over 357,000 units. Honda could have sold even more units of the vehicle but hit production constraints for the vehicle. It will be expanding production for the model soon. Additionally, Honda’s Ridgeline was voted as the best pick-up truck for 2016 in the U.S. auto market. The performance of vehicles in the vans and pick-up truck segment drove Honda’s sales growth in 2016.
As a result of this performance, the company’s operating profit climbed from $1.4 billion in the same period in FY2016 to $1.78 billion in FY2017. Two contributing factors to the increased operating profits were the lower expenditure on operating costs ($444.7 million) and lower outlay on Takata airbags defect related car recalls ($742 million). Combined these factors cancelled out the impact of foreign exchange losses for the company. Going forward the company’s strength in its core business should translate into strong unit sales performance. Since, the company manufactures close to 1.3 million of the 1.6 million vehicles it sold in the U.S. auto market in 2016, any changes to trade agreements with Mexico and Canada will not affect its performance significantly.
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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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