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Stay Away from Honda Motor as It Has Hit a Speed Bump

May 27, 2014 | About:
Rustic Nomad

Rustic Nomad

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Honda Motor (HMC) recently released mixed results. The results were decent, but not so impressive. Honda saw decline in the net income as a result of its underperformance in various markets. However, Honda saw a slight improvement in the top line, which was due to the weakness in yen. Let us take a look at Honda’s business and prospects.

The Quarterly Performance

Honda's consolidated net sales increased 16.3% year over year to $28.75 billion. Honda received good response in the Asian market, which can be seen by the fact that the company’s unit sales grew in Asian markets. The changes made by Honda in its models, which are sold in Japan, were not welcomed and the auto maker saw declining sales in Japan. Also, in the U.S., Honda failed to capture market during the construction boom as sales of Honda’s pick-up trucks fell in that region.

Moving on to financials, Honda’s net income declined 7% from last year to $1.24 billion. Though Honda’s sales grew, still the company saw a declining net income. The auto maker suffered weakness due to an unprofitable product mix and low sales of pick-ups and SUVs.

Sales in Japan nosedived 24%. This weakness was due to the expiry of government’s subsidiary on green cars. As a result of this, Honda was severely impacted and is now gearing up for improvement in the next quarter.

The Road Ahead

The pick-up truck and SUV market in the U.S. is booming. Many of the auto makers such as Ford and General Motors hold a good edge in the pick-up truck market. Honda’s management thinks that this is a hard shell to crack as the company failed to cash in on the trend of growing auto sales in the U.S. However, Honda expects to benefit in the future by updating its MDX model.

Honda is working on product innovation. It is focusing on customer preference and is making efforts to update its models as per specific customer requirements, aiming at accelerating the supply. In addition, Honda is also revamping the production system and for this, it is building new plants aiming at accelerating production. Moreover, Honda is planning for technological advancements which might help it in improving its sales in fiscal 2014.

Honda is focusing on Japan to gain back the momentum with good sales. The company is confident of rescuing sales in Japan with the launch of its new car Fit Compact. Also, the company is looking to increase its deliveries to 6 million units by 2017. 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.

Competition

There doesn’t seem to be an easy escape for Honda as it is facing stiff competition from Ford as its pickups have been doing very well. According to recent studies, sales of Ford’s pick-up trucks have increased by a good 22%. Ford is seeing tailwinds on the international front as well. It is slowly getting hold of the Asian markets also. In China, Ford is growing at an aggressive pace as some of its cars such as the EcoSport have gained traction.

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.

Conclusion

Honda is not a good pick now as its pick-up trucks are suffering weakness and auto makers such as Ford and Nissan are doing well in their business. Considering this, Ford can be a better buy than Honda.


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