Honda Pulls Ahead of the Pack

Shares of Ford Motor Co. (F) jumped more than 4 percent in early trading on Monday, following an analyst upgrade. Although there are indications that Ford is on the mend, risks remain. Risk-averse types looking for exposure to the auto & truck manufacturers industry may prefer to steer clear of Detroit for now, but instead focus on foreign companies such as Honda Motor Co., Ltd. (HMC), which have been grabbing market share. Honda recently landed on the Reuters Select stock screen for Industry Leaders.

This is not to say that there are no risks associated with investing in a company like Honda. After all, Honda is a Japan-based firm, and, as such, its American Depositary Receipts [ADRs] expose US investors to additional political, economic, and currency risks that they do not encounter when holdings shares of wholly domestic firms. But, Honda is not in the turn-around phase of business, as are Ford and General Motors Corp. (GM).

Still, Ford and GM shares have climbed nearly 16 percent and 10 percent, respectively over the last month. By comparison, Honda's shares have advanced nearly 11 percent during this period, and the average gain for the industry is just over 8 percent. Honda's stock-price performance helped it land on the Industry Leaders stock screen, which filters for stocks that have outperformed the industry by at least 10 percent.

The screen also requires that a company must have a reasonable valuation, and it is here, since Ford and GM have been posting losses, that Honda pulls ahead. The screen requires that a company's price to earnings [P/E] ratio must be no more than 10 percent above the industry norm. Ford and GM, with earnings per share [EPS] in the red, have P/E ratios that are not meaningful. Although Honda's shares are trading at a slight premium to the industry norm, they are about 6 percent higher, as indicated below.

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To rank among the Industry Leaders, a company must also have superior growth rates. The screen looks for companies that have five-year revenue and EPS rates that are at least 10 percent faster than the industry mean. Honda's five-year averages blow past the industry. The company's revenue growth is also superior over the trailing 12-month [TTM] and most recent quarter [MRQ] periods.

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Although the industry's average earnings pace has increased substantially in the MRQ and TTM spans, there are two things to remember: First, it is easier to post faster growth when starting from a lower base. Second, it is important to realize that such fast growth rates are not sustainable over the long haul. By comparison, Honda was already growing at a fast clip and it has accelerated this earnings pace of late. A key factor contributing to Honda's earnings improvement is its profit margins, which widened in the TTM time frame from their five-year averages.

Learn about Profit Margin Ratios

Honda's superior net margin cemented the company's appearance on the Industry Leaders screen, which requires a TTM net margin that is at least 10 percent greater than the average industry figure.

At the time of publication, Erik Dellith did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.