Honda Can Fatten Margins With More North American Production

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As part of its measures to address margin erosion caused by a strong Yen, Honda Motors ( HMC ) is increasing its production capacity in North America to reduce its dependence on the Japanese exports. Currently, 85% of Honda's cars sold in North America are manufactured in the region. However, the automaker is expanding the capacity of its plants in the U.S. and Canada while building a new plant in Mexico. With this move, almost 96% of the total cars sold in the region would be made within North America once the plant in Mexico becomes functional in 2015.

Made in America

Since a significant portion of Honda's cars are produced in Japan, a strong Yen is hurting the margins of its Japanese exports to North America. Currently, the U.S. Dollar will fetch you around 79 yen. Four years ago, the U.S. Dollar would have got you 110 yen. This means that Japanese exports have to either survive on thin margins or be priced higher, thereby losing their competitive edge. Another aspect that could work in favor of Honda is that there has been a rise in preference for things made in America (especially with the precarious economy and unemployment, so a product manufactured in the U.S. won't hurt). If Honda uses this fact carefully as part of its marketing, it might just be able to sell those few extra vehicles.

Margins Already Improving

Honda's margins were hurt badly in 2011 as natural disasters caused production and supply chain constraints, leading to reduced sales. On the brighter side, Honda has rebounded strongly this year with vehicle sales in the U.S. up 19% in the first seven months of the year.

Honda hopes to accelerate the growth momentum with the launch of Accord 2013 in September. The midsize sedan segment in the U.S. is highly competitive with the likes of Camry, Accord, Altima, Fusion, Malibu and Sonata in the offering. Accord currently trails Camry in this segment but, with the new Accord expected to be 15% more fuel efficient, we could witness a role reversal.

We have a price estimate of $41 for Honda Motors , which is around 20% above the current market price.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: F , GM , HMC , TM

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