Risk-Reward With Honda Motor

With the stock down over 16% in the last quarter, it's a good time to start buying.

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Jul 16, 2018
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Honda Motor Co. Ltd. (HMC, Financial) turns 70 this September, and while the financial performance has steadily improved, the market is not rewarding this industry at all. In fact, all the major car makers trade at ridiculously low price multiples.

Price-earnings ratios of major auto makers:
Honda (HMC, Financial) : 5.58
Ford (F, Financial) : 5.97
Toyota (TM, Financial) : 8.75
GM (GM, Financial) : 9.47
Fiat (FCAU) : 6.75

This is partly because of the Tesla (TSLA, Financial) disruption, but it’s also a product of people simply not needing a car thanks to ride sharing on Uber or Lyft and car rental from Car2Go or ZipCar. It’s just easier than ever to access a car for what you need rather than buying it and carrying all the expenses. I know people who are turning in leases and going carless here in Washington, D.C., because it’s going to save them $1,000 a month. Granted, that’s just here in America where only 19.3% of the population lives in rural areas, despite those areas covering 97% of the land.

However, Honda still sells many cars every month here in the U.S. In June it moved over 132,000 vehicles, putting it in the top five of all autos sold. In fiscal 2018, the company sold 24.8 million cars and motorbikes, generating sales of 15.4 trillion yen (JPY) or $137.1 billion dollars with fairly good margins (21% gross), helping it amass over $22 billion in cash. Some of that it needs to run operations and pay bank rates on its lending, but much of it can go back into new ways to grow.

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Since 2009, while the company’s net income is up nearly 10 fold, its sales and book value have risen just 50% and 77%, respectively -- not the kind of results you hope for as an investor. In fact, the stock has been dead money since summer 2009. And, now with this trade war likely to hit every manufacturer, Honda won’t be immune even though it does have a major U.S. presence.

With all that in mind, when looking at the numbers alone, it’s hard to overlook the value. The new Acura NSX looks beautiful, and eventually its electric series Clarity will be a big seller with the company’s ultra-low lease rates.

Historically:
P/E: 13.9
P/B: 1.0
P/S: 0.5

Currently:
P/E: 5.6
P/B: 0.7
P/S: 0.4

Automobiles will still have a use in the future. More people will populate the earth and desire the freedom that a car, truck or bike gives them.

If analysts are right and the company generates north of $3.70 in earnings per share this year and $4 next year, it makes buying the stock now a no brainer. Maybe that’s why Charles Brandes (Trades, Portfolio) and Jim Simons (Trades, Portfolio) both have bought more than a million shares worth of Honda Motors at prices close to the current trade price.

Disclosure: I have no positions in any stock mentioned in this article.