A Blowout for Honda

By Peter Pham - August 27, 2012 | Tickers: F, HMC, NKY, ^NI225, TM | 0 Comments

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A couple of months ago we profiled Honda’s (NYSE: HMC) return to form after having to process the twin disasters of the tsunami as well as the flooding in Thailand.   The release of their 2^nd quarter earnings confirms that the Japanese vehicle manufacturer is continuing to strengthen their position in the ever-changing market for cars and trucks. 

Honda posted quarterly profit of 131.7 billion yen ($1.7 billion) a sequential rise in profit of 400%, from 31.7 billion yen. Sales for the April-June quarter jumped 42% to 2.44 trillion yen ($31.2 billion). Across both models and regions Honda recorded impressive performance, especially Japan & North America where vehicle sales doubled.   Like nearly everyone else, European sales were lackluster.  Honda’s regional revenue increased 61% in Japan, 66% in North America, 37% in Asia ex-Japan while Europe’s revenue dropped 2%

Its total sales for the quarter were 849,000 vehicles up from 458,000 a year earlier, which puts them on pace to hit their sales goals for 2012.  Honda expects to sell 4.3 million vehicles for the fiscal year, up from 3.1 million vehicles for last year, this depends mainly on its performance in two key markets: first is Japan, where its N-Box mini-car is a favorite, and second is the U.S., where the next generation Accord is on the way.  The CR-V is putting up record sales numbers this summer in the very important compact SUV segment, outselling all others except the Ford (NYSE: F) Escape, which just launched a new version.  The Civic in all its forms is outselling the Corolla/Matrix.

The Accord is the big one for Honda, and their inventory overhang will pressure margins in the lead up to the seventh generation Accord’s introduction in Q4.  Toyota (NYSE: TM) is back on top with the Camry and the U.S. mid-sized sedan is the most crowded and competitive market in there. 

Economic uncertainty, rising oil prices, and local distortions in the energy sector are things all car manufacturers have to deal with.  For Honda in India, where 2 wheeler sales are extremely important to their growth plan, navigating the distorted market for diesel powered cars will need to be carefully handled.  The unsustainable subsidized price of diesel in India put Honda behind the curve there where they are just now playing catch-up.  As the noise to end the diesel subsidy grows and gains credible political traction this will be a net benefit to Honda who has entrenched production in gasoline powered cars while they spin up their diesel business.

Honda two wheeler segment sales were up by 21 percent to 2.4 million vehicles against 1.9 million a year earlier. Despite strong sales, they have lost volume market share in the US as it dropped to 9% in 2011 from 10.6% in 2010 and 11% in 2009.  Recent sales figures, however, see that trend reversing. Through July, Honda has captured 9.7% of new car sales in the U.S. and they topped the 10% mark in July, a very good month for the industry which is now well-ahead of analysts’ hopes for 14 million cars sold in 2012.   While they still have a lot of work to do in both China and India, their diversity of revenue from both 2 wheel and 4 wheel business puts them in a good position to benefit from substitution effects in the case of a global recession in 2013.   It is committed to building their auto sales in two of the most important Asian markets, Indonesia and India with major production expansion plans.

Honda is trading at a forward multiple of 8.5 with a 2.4% yield.  The effects of looser monetary policy in China and around SE Asia will put a bid underneath the stock and the Nikkei 225 (NYSEMKT: NKY).  If the central banks in the West are acting right now to support their stock markets then companies with strong balance sheets should outperform.  I like Honda as a defensive yield play in a low yield environment that could explode on a global equity rally and strong SE Asian performance.

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