This Automaker Is Not A Good Investment

| About: Honda Motor (HMC)

Honda Motor (NYSE:HMC) recently released its first quarter results which were mixed. The company was helped by a weak yen to some extent but underperformance in some markets led to a drop in income, although revenue increased. Let's see how the results were and what can be expected of Honda in the future.

Mixed performance

Consolidated net sales increased 16.3% year over year to $28.75 billion. Honda witnessed an increase in unit sales in Asian countries but sales fell in Japan because of certain changes to the models sold in the country. The company has been unable to benefit from the construction boom in the U.S. as sales of Honda pickups fell in the region.

Net income declined 7% from last year to $1.24 billion. The reason behind this drop, despite a rise in sales, was due to an unprofitable product mix and low sales of pickups and SUVs, which generally carry higher margins.

There was an alarming drop in its home market of Japan where sales plunged 24% as the government's subsidies on green cars expired last year. So Honda's quarterly report has raised some concerns and we need to see if the company can get its footing back.

Twisty road ahead

Consumers in the U.S. are preferring pickups and SUVs manufactured by the Detroit carmakers such as Ford (NYSE:F) and General Motors (NYSE:GM), according to Honda management. The company has been unable to cash in on the trend of growing auto sales in the U.S. The sales drop in Japan is also a matter of concern. But the company expects to benefit from the positive trends in the U.S. by updating its MDX model.

The company is making an effort to cater to the needs of customers and the prevailing market conditions by updating its models and ramping up supply. Revamping the production system, building new plants for increasing production and adopting innovative techniques for upgrading might help Honda to improve capacity and sales during fiscal 2014.

The company is also looking to rescue its sales in Japan and expects better sales in the second half of the year when it releases the Fit compact. Despite the decline in this key market to 140,000 vehicles in the quarter from 185,000 last year, the company has kept its outlook for the fiscal year intact. Honda expects revenue of 12.1 trillion yen, up by almost 23% from last year with deliveries expected to be 4.43 million units. Also, the company is looking to increase its deliveries to 6 million units by 2017has been incurring costs on buidling the required infrastructure. These efforts should reap benefits in the future but the company will need to offer better models in the lucrative market for pickups in the U.S.


Ford is among the most important competitors of Honda and the Blue Oval's pickups have been doing very well. Sales of Ford's pickups have increased a phenomenal 22% this year, outperforming the industry's growth by three times. Also, Ford has been strengthening its position in the Asian market, especially China (where its sales jumped 47% in the first half of the year) on the back of popular models such as the EcoSport.

So the company is positioned well in both markets, the U.S. and Asia, particularly China. Also, Ford is much cheaper than Honda with a trailing P/E of 10.8 while Honda has a trailing P/E of 15x. So it is clear that Ford is the better investment of the two even though Honda might enjoy currency gains in the short-term.

Nissan (OTCPK:NSANY) is a Japanese auto manufacturer and another rival of Honda. It is also benefiting from Yen's devaluation. Its sales are gaining strength in the US and its Nissan Leaf is the leading electric vehicle in the nation. Sales of the leaf jumped a whopping 372% last month to 1,864 units from last year and has outperformed the likes of General Motors' Chevy Volt.

Nissan's is also reviving an old brand -- Datsun -- for launch in emerging economies such as India, Indonesia, Russia, South Africa etc. This move should have a positive impact on its sales in the future as the emerging middle class in these markets purchases cars. The first time car buyers in these countries will have an eye on Datsun, since it would ideally suit their budget.


Honda is not among the best automakers to invest in right now. The company's sales in the U.S., although improving, are being held back by a solid pickup truck offering while it's facing trouble in Japan. Considering these, either Ford or Nissan would be a better place for investors to park their money.

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.