Can Hybird Focus And Buybacks Push Honda Stock Up By 20% ?

Japan’s second-largest automaker, Honda Motor stock (NYSE: HMC), has seen its stock rise by just about 1% this year, meaningfully underperforming the broader indices. In comparison, rival Toyota (NYSE:TM) has seen its stock rise by 7% over the same period. Honda had a solid fiscal FY’24 (ended March 31), with revenue rising 20% year-over-year and net profits growing 70%, led by a weak yen and strong sales of the automobile business post the easing of Covid-19 and related supply chain issues. Automobile unit sales jumped by 11% year-over-year during the last fiscal, although motorcycle sales remained almost flat.

That said, there are a couple of issues that have likely been weighing Honda down. Honda’s growth is likely to slow over the next fiscal year. Automotive unit sales are likely to rise just 2%, as the post-Covid demand boom eases, with sales in China and Europe projected to decline. Moreover, the company is projecting that overall revenue will decline by about 0.6% to about 20,300 billion yen ($127 billion) for FY’25, due to the potential strengthening of the yen. However, operating profits are likely to rise marginally this year.

Investors are also likely concerned about Honda’s longer-term prospects. While Honda has been a laggard in the electric vehicle space, with EVs comprising a very small percentage of deliveries, the company is doubling down on its EV strategy with new commitments including an $11 billion investment in a Canadian EV hub and its transformation of its Ohio operations. The company projects that R&D expenses for the year to grow about 22% to 1,190 billion yen, while capital expenditures are expected to grow almost 70% year-over-year to 670 billion yen. However, Honda’s big push comes at a time when the broader EV markets are cooling off, with legacy automakers also slowing down their investments in EVs. For example,  Ford says that it would delay about $12 billion in EV investments. The high investments into EVs at a time when demand is cooling is likely to weigh on profitability in the near term. Moreover, it remains to be seen if Honda can compete in markets such as China, where local producers are seeing a surge in demand for their electrified vehicles. Moreover, Chinese-made vehicles are increasingly accepted globally, with China poised to become the world’s largest car exporter this year, overtaking Japan. This could pose a threat to companies such as Honda.

HMC stock has seen little change, moving slightly from levels of $30 in early January 2021 to around $31 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. In comparison, Amphenol Corporation stock (NYSE:APH), a company that makes electronic connectors, has been a big beneficiary of the electrification of the auto industry, with its stock rising by over 2x over the same period. Turns out, APH is part of the 30-stock Trefis High Quality (HQ) Portfolio, which has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the uncertain macroeconomic environment with elevated interest rates, could HMC face a similar situation as it did in 2021 and underperform the S&P over the next 12 months – or will it see a strong jump?

Honda’s valuation is not exactly expensive with the stock trading at about 7.5x projected FY’25 earnings. We see the company’s reasonable valuation, its plans to boost share buybacks, and potential for gains in the hybrid automobile space as positives for the stock. We value Honda stock at about $38 per share, which is about 20% ahead of the market price. See our analysis of Honda Valuation for more details on what’s driving our valuation for Honda. Also, see our analysis of Honda Revenue for more details on Honda’s key revenue streams.

[1] Returns as of 6/24/2024
[2] Cumulative total returns since the end of 2016