Honda Stock Looks Like A Buy Following Strong Q3 Results

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HMC: Honda Motor logo
HMC
Honda Motor

Honda Motor stock (NYSE: HMC) posted a stronger-than-expected set of Q3 FY’23 results last week with revenues rising by 20% year-over-year to 4,438.1 billion yen (about $34 billion) and operating profits rising by about 22% to 280.4 billion yen ($2.1 billion). While the company benefited from rising motorcycle sales and a weaker Japanese yen, this was partly offset by a decline in automobile sales, amid a continued shortage of semiconductors and Covid-19-related disruptions in China. For perspective, automotive volumes fell 12% to 955,000 units, while motorcycle units rose 10% to 5.1 million. Honda’s operating margins remained roughly flat at 6.3% weighed down by high raw material prices. Now Honda actually revised its outlook for FY’23 to account for the recent headwinds in China and supply chain snags, reducing its automotive sales guidance by 6.1% to 3.85 million vehicles from 4.1 million units. Revenue guidance was also revised downward by 150 billion yen to 17,250 billion yen ($131 billion). However, the company reiterated its annual operating profit forecast of 870 billion yen ($6.6 billion) for 2023.

So is Honda stock a buy at current levels of about $25 per share? There are some macro trends that could benefit Honda and other automakers. The commodity price environment is improving with inflation cooling off. Semiconductor and supply chain issues are also likely to ease, helping production. At the same time, demand has remained strong, with consumers willing to spend more per vehicle. This could help Honda’s overall revenues and profitability over the next year.  Honda’s valuation also appears compelling. The stock trades at about 7.5x projected FY’23 earnings, which is well below larger rival Toyota (about 14x) and also lower than Ford (about 8x). Honda is also making reasonable progress with the transition to EVs, despite its relatively late entry into the space. The company plans to launch 30 electric models by 2030 by investing about 5 trillion yen (about $38 billion). We value Honda stock at about $30 per share, about 20% ahead of the current market price. See our analysis of Honda Valuation for more details on what’s driving our valuation for Honda. Also, see our analysis of Honda Revenue for more details on Honda’s key revenue streams.

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Returns Feb 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 HMC Return 1% 10% -14%
 S&P 500 Return 0% 7% 83%
 Trefis Multi-Strategy Portfolio -2% 10% 245%
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[1] Month-to-date and year-to-date as of 2/12/2023
[2] Cumulative total returns since the end of 2016

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