Honda Profits Surge On Strong American Sales and Weak Currency

By Trefis Team,

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Strong North American sales and a weak domestic currency lifted Honda Motors ' ( HMC ) second quarter earnings. The company's total revenues surged 27% to 2890.2 billion yen (~$29 billion) while the operating income climbed 70% to 171.4 billion yen ($18 billion). The company's net income stood at 120.3 billion yen (~$12.5 billion), up 46% from the previous years figure.

The company reaffirmed its guidance of selling 4.43 million units and generating a net income of 580 billion yen (~$5.9 billion) in fiscal 2014. Note that Honda has a fiscal year from April to March.

We have a $42 price estimate for Honda Motors . We are in the process of revising our estimates in order to incorporate the latest earnings.

Weak Yen Boosting Profits

Honda and other export dependent Japanese automakers' profits are getting boosted by the yen devaluation. Ever since the Mr. Shinzo Abe stepped into the PM's office late last year, the yen has depreciated ~25% against the dollar. This has benefited the country's automotive companies since the overseas profits now translate back to more yen.

To take advantage of a weak currency, Honda added a new manufacturing plant in Japan, which recently became functional. A greater proportion of production in Japan will only benefit Honda's margins now that the yen has depreciated against the dollar.

U.S. And Japan Lead The Way

Total automobile sales jumped 5.1% to 1.05 million units, helped by strong sales in the U.S. and Japan. North American customers are responding positively to the Accord, the Civic and the CR-V, all of which were refreshed in 2012. Sales in the region were up 11% in the latest quarter. North America is Honda's biggest market and accounts for more than 40% of the unit sales.

In Japan, sales were buoyed by the introduction of the latest version of the Fit (or Jazz as it is known in some countries). Honda introduced the third generation Fit during the quarter and received a staggering 62,000 orders within four weeks of its launch, almost four times the company's expectations.

Fit Can Provide Impetus

Honda wants to sell 6 million vehicles annually by 2017 and the vehicles refreshed/introduced on the Fit platform will account for a majority of the incremental sales. In fact, Honda expects the model's sales to pip those of Civic to become its largest selling vehicle. The sales could even surpass 1.5 million units by 2016 as per the company's estimates.

The global launch of the Fit will be next year.  Honda is building a new manufacturing plant in Mexico that will be complete by spring 2014. Once complete, the new plant will be able to churn out 200,000 Fits annually and will act as a hub for distribution to North America and Brazil. Honda's unit sales could accelerate in the second half of 2014, when the model has been launched in major markets across the world.

Uncertainty Still Looms In China

In China, things are still tricky for Japanese automakers as the public is still hesitant to buy Japanese cars after a wave of anti-Japanese sentiment spread out throughout the country following tensions between the two nations over claims on the disputed islands. Honda's sales through September are up 5.8% but they keep fluctuating from month to month. It's still not clear whether sales have normalized or not.

But Honda is optimistic about China in the long run. It has already introduced two China specific models, namely the Crider and the Jade, this year. Earlier in the year, the automaker also announced that it will step up R&D expenses in China in order to develop vehicles tailored to the needs of the Chinese people. Before the end of 2015, the automaker plans to roll out 12 new models in China.In fact, Honda is so confident about the success of its upcoming models that the automaker intends to double the sales to 1.3 million units annually by 2015.

See our complete analysis for Honda stock here

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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 Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Stocks: F , GM , HMC , TM , TSLA

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