Why Add Honda Motors To Your Stock Portfolio?

| About: Honda Motor (HMC)

Honda Motor (NYSE: HMC) recently posted some of its strongest sales figures in recent years, reporting record sales for its popular light trucks, led by models such as the CR-V, Odyssey and Pilot. Do these figures signal that Honda is finally making inroads in the U.S. market? Is it finally time for you to add Honda to other car stocks in your portfolio?

FY 2014 Earnings Results

For the fiscal year 2013, Honda's revenues grew an impressive 25% from ¥9.9 trillion ($101.10 billion based on an exchange rate of $1:¥97.93), which brought net income attributable to Honda to ¥367 billion ($3.7 billion). The higher earnings were driven by increased net sales in the automotive sector, which reached ¥7.7 trillion ($78.7 billion), up 32.8% from the ¥5.8 trillion ($59.2 billion) reported in the previous fiscal year. The bulk of sales in this sector were made in the U.S., which accounted for more than half of total net sales, followed by Japan with close to nineteen percent of sales. Motorcycle sales, however, fell slightly by 0.7% due to a decline in sales in Europe and Other Regions, although sales in other territories such as North America, Japan and Asia increased.

As a result of its stronger earnings results, the Japanese carmaker's financial position also strengthened. Its cash flows from operating activities increased to ¥800.7 billion ($8.2 billion) from ¥761.5 billion ($7.8 billion) in the previous fiscal year. However, declines in cash flows from the company's investing activities dragged down the amount of cash and cash equivalents at the end of the period to ¥1.2 trillion ($12.3 million).

For its FY 2014 guidance, Honda projected that its revenues would increase by 22.5% to ¥12.1 trillion ($123.6 billion) while its operating profit is seen to grow by 43% to ¥780 billion ($7.9 billion) and net profits to ¥580 billion ($5.9 billion). The increase in profits is seen as a result of the company's cost cutting measures as well as a favorable mix of new models.

Honda's Prospects

What are the prospects for Honda in the coming year?

In 2013, Honda expects to enjoy record sales in the US on the back of the popularity of four models, including the Honda Accord, the Honda Odyssey minivan, the Civic compact and the CR-V mini sport-utility vehicle. For the first four months of the year, the carmaker saw US deliveries increase by 6% to 468,650 units, while its Honda Accord became the top-selling car in the country in April, beating perennial top-seller Toyota Camry by delivering 33,538 units.

One source of growth that Honda can pursue in the US is the Hispanic market, which is dominated by Japanese carmakers. The carmaker also managed to land three of its models among a list of the top 10 vehicles popular with US Hispanics - the Civic, CR-V and the Accord. And the possibilities for the brand to grab market share from Toyota (NYSE:TM) is strong, as it recently won three Polk 2012 Automotive Loyalty Awards, including the vital Hispanic Market Loyalty to Make, which it won for the second year in a row.

Honda is also reporting strong sales in the Indian market, where it is the country's fourth largest car manufacturer. On the back of the successful launch of the Honda Amaze diesel sedan in the market, the carmaker reported its strongest ever monthly sales in May, growing by nearly 10% to 11,342 units, of which 6,000 units were Amaze cars.

But it is in the motorcycle sector where Honda has been enjoying unprecedented growth. It recently inaugurated its third motorcycle plant, which would bring total capacity to 4.6 million units by the end of FY 2014. The car maker also overtook local car maker Bajaj Auto to become the biggest seller of two-wheeled vehicles in the country, selling 2.6 million units in the year ending March 31. To consolidate its lead and increase sales to 10 million units by 2020, Honda plans to increase the number of dealerships as well as launch a new model every quarter. The Japanese carmaker currently has some 19% of the two-wheeler market in the country.

The Bottom Line

Investors who want to add Honda to their portfolios should be prepared to hold on to the stock long term before they enjoy any appreciation in share prices, as the car maker enjoys slow but steady growth in the U.S. market. For example, its Honda Accord should continue selling well in the wake of reaching the top of new vehicle rankings by Consumer Reports, as well as its popularity with the growing Hispanic market. Motorcycles could also be another growth sector in the U.S. for the company, as North American motorcycle sales increased by 25 percent. For FY 2014, Honda anticipates that motorcycle sales in the U.S. could reach 315,000 units from the 250,000 units sold in FY 2013 and 200,000 units in FY 2012.

If Honda succeeds in consolidating its gains in the U.S. as well as in the two-wheel vehicle market, then it could see share prices rising to the $40 level it briefly touched in May, and even higher. The only thing that could drag share prices down is if Japanese car makers' sales in China decline further, but anti-Japan sentiment in the country seems to be easing as all three carmakers reported increased sales of new models as well as the popular sport utility vehicles in May, the first time increases were reported since Japanese products were boycotted late last year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.