Honda Motors (NYSE:HMC) is scheduled to announce its Q4 earnings on April 26. The most important factor influencing the movement of the Japanese stocks lately has been the yen devaluation. The yen has depreciated more than 20% in the last 3-4 months, which has sent the Japanese stocks soaring on expectations of heftier overseas profits. As a resultant, Honda’s stock has surged in excess of 30% in the last six months.
The impact of a weak yen might not be significant in the upcoming earnings since the companies generally have their currencies hedged for the next few months. For fiscal 2013 (i.e. April’12- March’13), the automaker expects the effective exchange rate to approximately equal to 81 yen to a dollar, whereas the current exchange rate is close to 100 [Honda Investor Relations]. So, we don’t expect the weak yen to play a big part in the fourth-quarter earnings. Maybe from the first quarter of fiscal 2014, one can expect the effect of a weak yen to reflect on the income statement.
It is also important to note that the impact of a weak yen might not be as significant for Honda, as compared to other auto companies such as Toyota, since only a fraction of its vehicles are exported from Japan. Vehicles exported from Japan will tend to have higher margins since the expenses will be incurred in yen, but the overseas profits will inflate when translated back to yen. However, to take advantage of a weak currency, Honda is opening a new plant in Japan, its first in almost 50 years. The plant will have a capacity of 250,000 units, and will be primarily used to manufacture compact cars like the Fit.
We have a $42 price estimate for Honda Motors, which is slightly higher than the current market price.
Riding High In America
North America, the automaker’s biggest market that accounts for more than 40% of the unit sales, continues to perform strongly. Honda’s sales are up 5.5% through March, helped by the Acura brand, whose sales are up 15%. Acura accounts for a little more than 10% of Honda’s American sales, but since the luxury brands generally have fatter margins, the overall profitability should get a boost [Honda American sales, Honda.com].
Acura sales had peaked at 209,610 in 2005, but the brand has fallen out of favor with the customers since, partly because of less investment in the brand as well as competition. Honda could only manage to sell 156,216 Acura cars in 2012. In order to turn around its Acura brand, Honda is pouring in $1 billion, which will see the automaker launch an array of refreshed models such as the RLX, the MDX sport wagon and the NSX super sports car.
Weak Chinese Sales
China continues to remain a worry as anti - Japanese sentiment within the general public is pushing its sales down. Honda sales were down 22% through February and declined 6.6% in March [China’s March Passenger Vehicle Sales Gain 13% on Discounts, April 11, 2013, bloomberg.com]. On the other hand, total vehicle sales in the world’s largest automobile market, are up 13%. Unless the Japanese brands regain popularity with the Chinese customers, they will continue to lose market share.
Weak Chinese sales have already forced the automaker to cut its full-year sales forecast to 4.06 million, from 4.12 million. China accounts for about a sixth of Honda’s global sales and is the automaker’s second biggest market .
Disclosure: No positions