Honda Provides Superior Asian Exposure (If You Can Stomach North Korean Risk)

Includes: HMC, NTES, XINGF
by: Erik Dellith

Investors in Asia are facing heightened risk after North Korea conducted a nuclear test, a move that will likely result in sanctions against the isolated country. While that is pretty much a given, the impact on regional economies and markets is uncertain. For investors looking for exposure to Asia and willing to stomach the region's latest political risk, we took a look at companies domiciled in China, Japan, and South Korea and found car maker Honda Motor Co., Ltd. (NYSE:HMC) ahead of the competition.

The economies of Asia, including regional powers such as China, Japan, and South Korea, have been chugging along. Growth in China's economy, which expanded more than 11 percent in the June-ended quarter, may drive consumption of base metals next year. Meanwhile, Japan's new Prime Minister Shinzo Abe said recently that the economy is on a firm recovery track. And, South Korea's industrial production has shown surprising strength. Still, events in North Korea may impact business and consumer activity in other countries in the region, if not directly, through impacting sentiment stemming from uncertainty regarding political tensions.

In our search for opportunities, we took a look at companies in the above-mentioned countries that have American Depositary Receipts (ADRs). Out of the approximately 8,900 stocks in the universe, 133 are ADRs based in these countries. We then looked for the companies appearing on the Reuters Select stock screens. This left us with a list of nine companies. (Click here to download an Excel sheet comparing these nine Asian ADRs.)

First, we wanted to identify companies with reasonable valuations. We filtered for companies with price to earnings (P/E) ratios that are no more than 10 percent above the industry average. The idea here is that we want to guard against stocks with loftier valuations, which may have farther to fall in the event of a market downturn. This resulted in a list of six companies.

Then we filtered for companies with superior profit margins. After all, the wider a company's profit margin, the more room they have to work in the event that input prices rise or revenues slip. Here, we looked for companies that have operating profit margins that are wider than the averages for the respective industries over both the last five years and in the trailing 12-month (NYSE:TTM) time period. This left us with three companies: Honda Motor Co., Ltd. (HMC),, Inc. (NASDAQ:NTES), and Qiao Xing Universal Telephone Inc. (XING)

Finally, we turned to the analysts who cover these stocks to see what they think about the business prospects. Specifically, we looked for the companies where analyst estimates for next years' earnings per share [EPS] have improved in recent weeks. This is where Honda pulled ahead. The consensus estimate for slipped from $1.30 eight weeks ago to $1.25 at present. Meanwhile, no analysts provided with estimates for Qiao Xing Universal Telephone eight weeks back. Because there was no point of reference, it was omitted. By comparison, the EPS estimate for Honda climbed from $2.76 two months ago to $2.88 at present.

Honda is available for our consideration on this list because it appeared on the Reuters Select stock screen for Industry Leaders, which seeks to identify companies that are leading their respective industries in several key areas, including revenue and earnings growth, profitability, and stock-price performance.

The screen requires that a company post revenue and EPS growth that is at least 10 percent faster than the industry average over the last five years. As indicated below, not only does Honda's revenue and EPS performance exceed its peers over the long haul, but its revenue growth in the TTM period and in the most recent quarter [MRQ] also eclipses the industry norm.

Learn about Growth Rate Ratios

Next, the screen focuses on profit margins and requires that a company's TTM net profit margin must be at least 10 percent wider than the mean of its industry. As indicated below, Honda's profit margins, not just at the net level but in general, are superior to the industry averages, both over the last five years and in the TTM span.

Learn about Profit Margin Ratios

Given the company's superior long-term growth rates and its impressive profit margins, it is little surprise that Honda's shares have climbed more than 4 percent over the last four weeks. This easily surpasses the industry average decline of 0.28 percent and helps solidify Honda's presence on the Industry Leaders stock screen, which requires an outperformance of only 10 percent.

At the time of publication, Erik Dellith owned shares of SPY, the S&P 500 index Exchange Traded Fund.

Note: This is independent investment and analysis from the 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

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