Honda Motors
(
HMC
) is scheduled to announce its Q3 earnings on January 31. Japan's
third largest automaker has recovered impressively in the last year
after supply chain disruptions lowered its sales volume
significantly in 2011. Furthermore, Honda is chasing a target
of 6 million annual sales by 2017 as part of its mid-term plan. The
stock has surged more than 20% in the last three months, helped
partially by a weaker Yen.
The automaker's margins should widen now that sales have
normalized post the supply chain disruptions. Higher sales mean
that the operating expenses will spread out over a larger revenue
base, resulting in higher margins. The company-wide operating
profits swelled more than 260% in the first half of its fiscal
(i.e. April-September). Profitability in 2011 was abnormally low as
the company was badly hurt by the earthquake in Japan.
International Markets Are The Growth Areas
The automaker has made a strong recovery in the U.S. with sales
up 24% in 2012, helped by model refreshments of its best sellers
Accord, Civic and the CR-V. North America is Honda's biggest market
and accounts for more than 40% of its sales. The automaker plans to
carry on the momentum by launching new, smaller vehicles such as
the refreshed Fit and the urban SUV, which it showcased at the
recently concluded Detroit Auto Show.
See our complete
analysis for Honda stock here
China is the automaker's second biggest international market
after the U.S. and accounts for about a sixth of the
sales. Last year, Japanese auto companies such as
Toyota Motors
(
TM
), Honda, Nissan and Mazda, suffered in China after tensions
ignited between China and Japan over claims to disputed islands in
the East China Sea. Overall, China sales were down 3% to 600,000
units in 2012, and December sales were down 19%. Although the
Chinese sales are slowly returning to normal levels, it will take
some time before the Japanese companies revert to the growth
trajectory.
Domestic Situation
Honda's Japanese sales could weaken this quarter since
incentives provided by the government to revive the economy have
ended. Although the full-year sales will be strong, they can
largely be attributed to subsidies provided by the Japanese
government, which lasted through September. People rushed to
register their vehicles before the subsidies ended which could
consequently impact the 2013 sales. Therefore, we expect the
Japanese market to remain flat or even decline this year.
Japan's newly-elected Prime Minister, Shinzo
Abe, plans to devalue the Yen by unlimited printing and has
raised the inflation target to 2% from 1%. A strong Yen has
been seen as an impediment to the competitiveness of the
export-dependent Japanese companies and so a weak domestic currency
should benefit them in the long run. However, the
recent currency devaluation is not expected to play a
significant role in the upcoming quarterly results since most
companies usually have their currencies hedged. The effects of a
weak Yen might be visible from the fourth quarter (i.e. Jan-March),
or even later.
Our price estimate of $36 for Honda's stock is about 5% below
the current market price.
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