Will Honda’s Undervalued Stock Rise Following Q1 Results?

Japan’s second-largest automaker, Honda Motor stock (NYSE: HMC), has seen its stock rise by just about 2% this year, meaningfully underperforming the broader indices. In comparison, rival Toyota (NYSE:TM) has seen its stock rise by 5% over the same period. Honda is poised to report its Q1 FY’25 results in early August. We expect revenues to come in at about $33.7 billion for the quarter, roughly flat versus last year and in line with consensus estimates. So what are some of the trends that are likely to drive Honda’s results for the quarter?

Honda had a solid FY’24 (ended March 2024), with revenue growing 20% year-over-year and net profits rising 70%. Honda has benefited from a couple of trends, including a weak yen (the yen has declined about 7% versus the dollar over the last 12 months) and strong sales of the automobile business post the easing of Covid-19 and related supply chain issues. Automobile unit sales grew 11% over the last fiscal year, although motorcycle sales remained almost flat. That said, Honda’s growth is likely to slow over FY’25. 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 amid economic headwinds and rising competition. However, business in the U.S. should continue to grow, driven by demand for its hybrid and gasoline-based models. Things could be somewhat mixed on the margins front as well, as 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.

HMC stock has seen little growth, gaining just about 5% between early January 2021 and 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 close to 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?

Investors are also likely concerned about Honda’s longer-term prospects. Honda has doubled down on its EV strategy boosting investments into EVs when demand is cooling and this is likely to weigh on profitability in the near term. It also remains to be seen if Honda can remain competitive 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. Besides this, the potential strengthening of the yen could also hurt revenue growth in the medium term. (the yen gained about 5% versus the dollar over the last month)  That being said, 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 its 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 7/31/2024
[2] Cumulative total returns since the end of 2016