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Summary

  • Honda stock has lagged versus many of its peers over the past year.
  • Like Toyota, Honda is trading at a 52 week low with respect to price to forward earnings.
  • Based on probability distribution analysis, Honda has potential for immediate upside.
  • Honda's earnings history raises a red flag for investors.

Like all auto stocks, shares of Honda Motor Company (NYSE:HMC) have struggled in 2014.

(click to enlarge)Honda stock has had a rough start to 2014.

Source: Yahoo Finance

Furthermore, shares of Honda have performed noticeably poorer than many of their peers.

(click to enlarge)Honda, Toyota, GM, and Ford stock performance in the past year

Source: Yahoo Finance

Honda's latest earnings release emphasized weak foreign exchange rates as the primary reason for earnings growth. Clearly, the market has not been enthused with trading Honda stock in relation to dollar/yen exchange rates.

Like Toyota, Honda is currently trading at a 52 week low in respect to both trailing P/E and forward P/E.

(click to enlarge)HMC trailing P/E and forward P/E history

In order to calculate Honda's valuation, we'll need to look at the probability distribution of the past year's price to forward earnings.

Honda has traded closer to 11.25 times forward earnings than any other multiple in the past 52 weeks.

Based on this analysis, there is a 67.8% chance of Honda stock trading at 11.25 times forward earnings or greater. By combining the 11.25 forward P/E with Nasdaq's earnings estimates for Honda, we can arrive at an ideal valuation.

Honda has upside potential, but it's lack of earnings growth beyond the next couple of quarters creates concern. This issue may be leading to the lower stock price. Typically, I'm less inclined to deal with stocks that have flat forward share price projections.

To make matters more convoluted, Honda has not beat earnings estimates for six consecutive quarters.

I'm a firm hold on Honda stock until the company can produce earnings that beat estimates.

Source: Honda Has Value, But Investors Should Be Cautious