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The global auto industry is facing difficult times, but Honda (NYSE:HMC) is the best positioned of any automaker once an industry recovery begins. Barron's Jay Palmer says investors with a long-term view should keep a watchful eye on Honda's stock and be ready to buy when there are signs of an industry revival.

As U.S. automakers plead for a government bailout, and most European and Asian automakers get battered, Japan's Honda has been one of just two car companies whose U.S. sales rose in the first nine months of the year. In August, its U.S. market share reached a record 11%, making it the No. 4 automaker in the country.

The global economic slowdown has not left Honda unscathed. Its U.S. sales fell 25% in October, still better than the overall industry's 32% slide, and it expects 2008 U.S. sales to be off 2.4%, the company's first yearly decline in 15 years. Auto research firm J.D. Powers says industry recovery could be at least 18 months away, and hard times for the industry will mean hard times for Honda as well. However, this hasn't dampened the company's confidence. Honda plans to open a new U.S. plant this month that will produce 30,000 vehicles a month, and has chosen not to follow rivals in offering 0% financing.

Forecasting earnings for the rest of this year, let alone next, is difficult in such a tumultuous market environment. Honda, moreover, faces the effects of currency fluctuations, as every one-yen change against the dollar leads to an extra profit or loss of ¥18B (around $180M). Despite the uncertainty, or perhaps because of it, Honda has trimmed its 2008 operating profit estimate by 13% to ¥550B ($5.5B) and cut its net income forecast by 2% to ¥485B ($4.8B). As of the end of September, Honda had roughly $9.25B in cash and equivalents and around $22.25B in long-term debt, and its cash flow was strong. Its shares have a dividend yield of around 3% and trade at a P/E ratio of just under 9, near a 10-year low, based on 2009 estimated earnings.

Honda gets nearly 30% of its operating returns from non-auto businesses, notably from motorcycles which are selling well in Brazil and Southeast Asia. The company also has a small and promising unit called HondaJet which will soon begin selling light corporate aircraft. Honda also aims to expand outside of Japan and its biggest market, North America, to capitalize on the better operating margins it has elsewhere in the world. Its U.S. plants are non-unionized and extremely flexible, and the company is beginning a mini-new-product blitz and rolling out redesigns of existing vehicles.

Though the continued economic slowdown will no doubt make its presence felt, Honda is the automaker to bet on when the auto industry starts to turn around.

  • John Casesa, of New York's Casesa Strategic Advisors, believes "Honda is the best-positioned of any car maker to ride out this storm, and the best-positioned for a recovery. The stock is as close to being a blue chip as exists in the auto industry today."
  • Steve Usher, of JapanInvest, has a Strong Buy rating on the stock. "Honda is our preferred auto stock. It is a quality stock with tremendous value and potential."

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  • Bloomberg reports Honda is pushing to be included by the Fed in government purchases of commercial paper. A Honda spokesman says the company has no such plans.
  • Honda is 'actively considering' expanding a China-based plant that exports 43,000 subcompact cars a year to Europe. Honda is looking to export the cars to markets beyond Europe.
Source: Honda Has the (Horse)Power to Thrive - Barron's