One of the well-known automakers of Japan, Honda Motors (HMC, Financial), released its second-quarter results for the 2015 fiscal year on October 28 only to disappoint the analysts following its stock movement, and it clearly reflected the ongoing struggle the company faces in North America and Japan with product recalls that could even bring in legal charges creating pressure on its bottom line. It seems like the automaker is about to hit a financial speed bump due to drop in sales on a global basis. Let’s get into the quarter highlights and the outlook of the management to assess whether Honda remains a promising investment in the long run.
The number show
Revenue jumped 4.3% to 3.01 trillion yen from 2.89 trillion yen reported in the second quarter of the 2014 fiscal year. The rise in the revenue was mainly due to the improvement noticed in the motorcycle and automobile unit sales as well as the positive impact of the foreign exchange effect.
However, despite increase in revenue, the operating income decreased 4.1% to 164.4 billion yen from 171.4 billion yen, reported a year ago. This fell short of the Thomson Reuters analysts’ estimate of 184.1 billion yen for the quarter as operating profit. There has been an increase in R&D expenses even though Honda has tried to keep the costs under tight reins. Net income increased by 17.9% at 141.8 billion yen from 120.3 billion yen last year.
Recall costs becoming difficult to handle
Honda is the auto maker that stands most affected by the Takata airbag recalls. About 12 million vehicles worldwide have been recalled, of them half are Hondas recalled for the defective airbags. The worst part is that there is an escalating investigation by U.S. safety regulators. In a news conference, Honda’s executive vice president, Tetsuo Iwamura, stated, “We are reviewing our ties with Takata in terms of quality and supply…”
Honda, which buys almost half of its airbags from Takata, is currently under scanner for which it’s possible that the company delays any new model launches. Also, the automobile manufacturer had to recall 426,000 Fit subcompact cars and other vehicles for its own manufacturing problems. Honda states that such glitches in the rollout of a new version of Fit have hurt sales especially at the home turf.
Such recalls are on top of the increase in consumption tax this year in Japan, which has made business more difficult even at home. Also, the present environment in China is not very optimistic for the company’s model sales, and thus the company does forecast a gloomy outlook for the remaining year. This has made investors tense, but such headwinds are nothing new in Honda’s history.
Future forecast looks gloomy
Due to the present headwinds, Honda expects net profit of the year to stand at 565 billion yen (around $5.24 billion), which is down from 574.1 billion in the previous fiscal year. Also, in the second quarter the management has lowered its profit guidance which was earlier projected to rise to 600 billion yen by the end of the year.
Analysts have commented that the quarter results were a “bit disappointing” with respect to the forward outlook for the entire year. An analyst of Barclays commented, “The near term is going to be tough for them, but from a midterm to long-term perspective I’m still bullish on Honda.”
Concluding thoughts
Honda is presently under immense pressure and that is well-eminent in its quarterly results. It has also given a forecast which is not very convincing and has put investors into a pull-back mode. However, it would be best to observe how the company performs at least for the coming quarter and then maybe analysts will be in a better position to give their opinion of whether the stock should be sold or held in one’s portfolio on a long-term perspective.
