Honda Profit Plummets

| About: Honda Motor (HMC)

Japan’s second-biggest automaker Honda (NYSE:HMC) reported a sharp 95.6% fall in profit for the first quarter of its financial year ended June 30 due to a severe decline in unit sales. In absolute terms, consolidated net income reached $79 million (JPY 7.56 billion) or 4 cents (JPY 4.17) per share from $1.81 billion (JPY 173 billion) or $1.00 (JPY 95.56) per share in the prior-year quarter.

Consolidated operating income dipped 88% to $262 million (JPY 25.1 billion) due to decreased profits attributable to decreased revenue, an increase in fixed costs per unit as a result of reduced production and the unfavorable impact of currency effects caused by the appreciation of the Japanese yen.

Revenue in the quarter sunk 30% to $20.9 billion (JPY 2,002.2 billion), a result of decreased revenue in the automobile business and unfavorable currency translation effects.

In the Motorcycle segment, sales declined 17% to 2.25 million units. Unit sales in Japan shrank 22% to 45,000 units. Unit sales outside of Japan decreased 16.9% to 2.21 million units. This was due to a decrease in sales of motorcycle knocked-down parts for local production at Asian affiliates accounted for under the equity method and decreased unit sales in other regions including South America, more than offsetting increased unit sales in India and Vietnam. Revenue from sales to external customers declined 35% to $2.67 billion (JPY 256.3 billion) due to decreased unit sales and unfavorable currency translation effects.

In the Automobile segment, sales dipped 20% to 766,000 units. In Japan, unit sales amounted to 128,000 units, the same compared to the corresponding period last year. Results were due mainly to favorable sales of the Insight hybrid and FREED models despite a weak demand in the market.

Unit sales outside of Japan decreased 23.5% to 638,000 units due to decreased unit sales in North America. Revenue from sales to external customers decreased 32% to $15.9 billion (JPY 1,523.4 billion) due to lower unit sales and unfavorable currency translation effects.

Revenue from customers in the Financial Services business rose 7% to $1.62 billion (JPY 155.9 billion) due to an increase in operating lease revenues.

In the Power Product business, unit sales decreased 13.5% to 1.16 million units. In Japan, unit sales fell 55% to 71,000 units. Unit sales outside of Japan dipped 8% to 1.09 million units due to a decline of unit sales in Europe. Revenue from sales to external customers declined 34% to $693 million (JPY 66.5 billion) due to decreased unit sales of power products and unfavorable currency translation effects.

For fiscal 2010, Honda projected a 17% decline in net sales and other operating revenue to $86.5 billion (JPY 8,280 billion). Profit is expected to tumble 60% to $575 million (JPY 55 billion) or 32 cents (JPY 30.31) per share.

We continue to recommend HMC as Hold with a six-month target price of $27.00.