Today's spotlight is on Honda Motor Co Ltd (HMC, Financial), which recently experienced a 4% daily gain, culminating in a 17.26% gain over the past three months. With an Earnings Per Share (EPS) (EPS) of 3.71, the question arises: is the stock modestly overvalued? This article aims to answer this question by delving into a comprehensive valuation analysis of Honda Motor Co Ltd. Let's dive in!
A Brief Introduction to Honda Motor Co
Incorporated in 1948, Honda Motor Co Ltd initially made its name as a motorcycle manufacturer. Today, the company has diversified its operations, manufacturing automobiles, motorcycles, and power products such as boat engines, generators, and lawnmowers. In fiscal 2023, Honda, including its joint ventures, sold 22.4 million cars and motorcycles, with automobiles constituting 63% of revenue and motorcycles 17%. The rest is split between power products and financial services. Honda also manufactures robots and private jets.
Currently, Honda Motor Co's stock price stands at $36.63, while its GF Value, an estimate of fair value, is $28.48. This discrepancy suggests that the stock is modestly overvalued. Let's further explore this valuation with the company's income breakdown:
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Given the current price of $36.63 per share and the market cap of $59.90 billion, Honda Motor Co's stock appears to be modestly overvalued. As a result, the long-term return of its stock is likely to be lower than its business growth.
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Assessing Honda Motor Co's Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Hence, it's crucial to review a company's financial strength before deciding whether to buy shares. Honda Motor Co has a cash-to-debt ratio of 0.51, ranking worse than 53.31% of 1225 companies in the Vehicles & Parts industry. Based on this, GuruFocus ranks Honda Motor Co's financial strength as 6 out of 10, suggesting a fair balance sheet.
Here's a look at Honda Motor Co's debt and cash over the past years:
Examining Honda Motor Co's Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. Honda Motor Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $128.10 billion and Earnings Per Share (EPS) of $3.71. Its operating margin is 5.38%, which ranks better than 54.87% of 1252 companies in the Vehicles & Parts industry. Overall, the profitability of Honda Motor Co is ranked 6 out of 10, which indicates fair profitability.
Growth is a crucial factor in a company's valuation. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Honda Motor Co is 5.4%, which ranks worse than 51.33% of 1202 companies in the Vehicles & Parts industry. The 3-year average EBITDA growth rate is 3.7%, which ranks worse than 55.53% of 1075 companies in the Vehicles & Parts industry.
ROIC vs WACC
Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Honda Motor Co's return on invested capital is 3.76, and its cost of capital is 3.38.
The historical ROIC vs WACC comparison of Honda Motor Co is shown below:
Overall, Honda Motor Co's stock appears to be modestly overvalued. The company's financial condition is fair, and its profitability is fair. However, its growth ranks worse than 55.53% of 1075 companies in the Vehicles & Parts industry. To learn more about Honda Motor Co stock, you can check out its 30-Year Financials here.
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