Is Honda’s Stock Fairly Valued?

by Trefis Team
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Upside
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[Updated 02/19/2021] Honda Update

After rallying 29% since the end of FY 2020 (ended March 2020), Honda Motors’ stock (NYSE: HMC) is close to its near term potential. HMC’s stock grew from $22 at the end of FY 2020 to near $29 now, compared to the S&P 500 which has gained 59% since the end of March 2020. The company has seen flat revenues while earnings fell over recent years. Our dashboard Buy or Sell Honda’s Stock has the underlying numbers.

During the Covid-19 crisis, Honda saw revenue fall 14.5% in the first three quarters of FY 2021 (FY ends in March). In Q3 2021 (ended Dec 2020) recovery was seen as revenue grew to $36 billion, up 5.8% while earnings per share improved to $1.59 compared to $0.61 in the same period of the previous year. Revenue and earnings recovery were driven by automobile and the life creation business (advanced engine technologies) with a positive volume growth.

We expect Honda‘s revenues to fall by 8% to ¥14.5 trillion for FY 2021 (ends in March 2021). Further, its net income is likely to grow to ¥674 billion on the back of better operational margins, increasing its EPS figure to ¥390.81 in 2021. For FY 2022, revenues are expected to grow to ¥15 trillion, which will increase the EPS to ¥413.06, which coupled with the P/E multiple of around 8x and an exchange rate of 0.01$ to ¥ will lead to Honda’s valuation around $31, which is close to its current market price.

[Updated 12/23/2020] Does Honda Stock Have Upside As Automotive Market Recovers?

At the current price near $29 per share, we believe Honda Motors’ stock (NYSE: HMC) has a moderate upside in the near term. HMC stock has remained flat at $29 since the start of the year compared to the S&P 500 which has increased by 13% in 2020. The stock has performed worse than the market as the automotive industry was majorly hit due to the pandemic. Honda saw revenue fall 24% in the first 2 quarters of FY 2021 (FY ends in March). For Q2 2021 (ended Sep 2020) revenue was nearly flat at $34 billion while earnings improved to $1.32 compared to $1.03 in the same period of the previous year. Revenue and earnings recovery were driven by automobile and the life creation business (advanced engine technologies) with a positive volume growth.

The -15% fall in HMC stock price from FY 2018 to now is justified by a significant fall in earnings during those two years. Honda’s revenue was flat over the period at $138.9 billion (¥15.7 trillion) in FY 2020 (ended March 2020). Net Income margin decreased from 6.9% in FY 2018 to 3.1% in FY 2020. On a per share basis, earnings went down from $5.32 to $2.46. The fall in the margin was primarily due to higher operating expenses.

During the same period, the P/E multiple rose from 6.5x to 9x. The P/E improved in recent weeks as the company and sector are showing signs of recovery. Currently the multiple stands at 11.8x.

Where Is The Stock Headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Honda’s revenues and earnings took a hit for the first half of FY 2021, though there are signs of recovery in Q2 2021 as the company reported flat revenue and a growth in earnings compared to the same period in 2020. Q2 2021 also saw the automobile sector improve sales volume by 1% y-o-y to 1,235K units while sales volume for the life creation segment (formerly power products) rose by 18.6% y-o-y to 1,370K.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on FY 2022 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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