Will Honda's (HMC) Q3 Earnings Disappoint on Recall Expenses? - Analyst Blog

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Honda Motor Co., Ltd. ( HMC ) is set to report third-quarter fiscal 2015 results on Jan 30. In the last quarter, it had posted a negative earnings surprise of 5.26%. Let's see how things are shaping up for this announcement.

Factors Influencing this Quarter

Honda is currently focused on introducing new products and expanding its business in Asia, especially in India and Indonesia, to attract more customers. For fiscal 2015, operating income is likely to rise 2.6% to ¥770 billion. These should translate into higher revenues and operating income in the third quarter as well.

However, Honda reduced its net income guidance by 5.8% to ¥565 billion or ¥313.49 per share for fiscal 2015. The company also reduced its revenue guidance to ¥12.75 trillion from ¥12.8 trillion projected earlier. Honda, like most automakers, faces the challenge of frequent product recalls over the last few years. It is the largest customer of the Takata, whose faulty airbags have resulted in massive recalls by many automakers. The company has recalled nearly 13.4 million vehicles due to this problem, which will increase its expenses. Honda has also agreed to pay a cumulative fine of $70 million to the U.S. safety regulators for its failure to report hundreds of injuries, deaths and other consumer claims related to its vehicles.

Earnings Whispers

Our proven model does not conclusively show that Honda is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here, as you will see below:

Zacks ESP: The Earnings ESP represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate. Honda's Earnings ESP is 0.00% as the Most Accurate estimate and the Zacks Consensus Estimate both stand at 55 cents.

Zacks Rank: Honda carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions, as is the case with Honda.

Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

O'Reilly Automotive Inc. ( ORLY ) has an Earnings ESP of +2.40% and a Zacks Rank #2 (Buy). The company will report its fourth-quarter 2014 results on Feb 4.

Lear Corp. ( LEA ) has an Earnings ESP of +1.46% and a Zacks Rank #2. The company's fourth-quarter financial results are scheduled for release on Jan 30.

AutoNation Inc. ( AN ) has an Earnings ESP of +1.10% and a Zacks Rank #3 (Hold). The company will release its fourth-quarter earnings results on Feb 3.

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AUTONATION INC (AN): Free Stock Analysis Report

HONDA MOTOR (HMC): Free Stock Analysis Report

LEAR CORPORATN (LEA): Free Stock Analysis Report

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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 , Business , Earnings , Stocks
Referenced Symbols: ORLY , AN , HMC , LEA

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