Honda’s Revved Up for $38 on Improving Auto Sales and Profit Margins
Even though Honda‘s (NYSE:HMC) results for quarter ended September 2011 continued to be affected by the impact of Japan earthquake and unfavorable currency translation, they were significantly better than the quarter ended June 2011. But Honda’s revenues from automobiles increased by more than 13 percentage points (ppt) quarter-on-quarter (q-o-q), as Honda was able to emerge from the effect of Japan earthquake and expand its production capacity. While the firm tried to control costs by reducing its selling, general and administrative expenses in the last quarter, increased raw material costs and increased fixed costs per unit due to reduced production output continued to pressure margins. However going forward, we see strong upside to the stock due to market share gains and improved margins as the firm achieves full production capacity. Honda competes globally with other major automakers such as GM (NYSE:GM), Ford (NYSE:F), Daimler AG (NYSE:DAI), Honda (NYSE:HMC), Toyota (NYSE:TM), Hyundai (SEO:005380) and Nissan (PINK:NSANY).
Our price estimate of $38 for Honda’s stock is around 25% above the current market price.
See our complete analysis for Honda stock here
Automobile sales to recover in medium-term
Honda’s total automobile sales last quarter declined 14 percent year over year (yoy) mainly due to decreased unit sales in the North America and Japan caused by supply-chain disruptions from the Earthquake. But q-o-q automobile sales grew by more than 40 percent, led by Asia (excluding Japan) which witnessed sales growth of 106 percent.
As Honda restores its production facilities and expands production, the replenished dealer inventories will continue to help the company expand its sales. But the threat to automobile sales remains the weak economic environment. Major automobile markets like the U.S. and China are facing pressure from negative economic headwinds. While the U.S. is battling an economic slowdown and persistently high unemployment rates, China is battling inflationary pressures which threaten to slow its economy.
Thus we believe that Honda will be able to recover its lost market share in the medium-term, but the road to full-recovery will be prolonged due to a slow recovery in automobile markets.
Reduced fixed costs per unit will reduce pressure on margins in near-medium term
With expanding production levels, Honda’s fixed cost per unit will reduce. This will help improve margins at the firm’s automobile division. Also, many industrial analysts are predicting an industrial slowdown in the medium-term. An industrial slowdown will reduce the demand for important for important automobile raw-materials such as metals, which will help lower raw-material prices. This will also help boost Honda’s margins in near-medium term.
In the long-term, we expect that expanding global economy will again come to haunt Honda’s margins through increased raw material costs because of increasing industrial demand.
You can drag the trend lines in the modifiable charts above to see the impact of these trends on Honda’s stock value.
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